EUROPE 2012: A DIRE DOUBLE DIP?
By Walter Kurtz, Sober Look
A combination of capital constraints and the carry trade gift from the ECB is providing little incentive for the eurozone banks to make significant new credit available to either the consumer or the corporate sector. Even with all the risks, sovereign credit is generally preferable from the risk perspective than the consumer or corporate exposure in the same countries. A credit officer is far more likely to approve a 2-year Spanish government bond than loan to a Spanish corporation or a pool of Spanish mortgages. These tight credit conditions are expected to persist for some time, and combined with fiscal consolidation, will put significant downward pressure on the eurozone GDP growth.
Fitch: Tightening financial conditions, falling confidence and new fiscal austerity measures have led Fitch to revise down its forecast for eurozone GDP growth to just 0.4% in 2012, from 1.6% in 2011.
Fitch, together a number of other economic forecasters predict slight to no growth for the euro area nations. The consensus is for roughly zero growth during 2012. But some well respected research economists see a much more dire situation. Capital Economics (CE) is one of those. CE by their own admission has been a good 100 bp below consensus for the eurozone 2012 forecast each month this year.
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| Source: Capital Economics |
Their latest forecast is a true “double-dip” recession in the eurozone, with GDP contraction levels that parallel those of 2008.
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| Source: Capital Economics |
What makes this forecast particularly bearish, is the expectation for 2013, with continuing economic deterioration. Part of the reason for such gloomy prediction is CE’s view that the eurozone will not exist for much longer in its current form.
Our assumption is that a limited form of euro-zone break-up will commence in 2012, with the exit of Greece followed by further small country departures in 2013… But a bigger form of break-up, perhaps involving Italy, would cause much greater damage.
This is akin to a “black swan” scenario and would send shocks across the global economy. Let’s hope the reality is closer to the consensus.
* Walter Kurtz is a credit specialist at a NYC based hedge fund.
Black Swan is something that is not forecastable. A Eurozone break up is very well forecastable and hope is not an investment strategy. Thus this is at best a grey swan.
“Black Swan is something that is not forecastable” That’s not correct
In Taleb’s terms a Black swan it fully predictable for some, and totally unpredictable to others. For sure, the real black swans were totally predictable for those inhabitants of the black swan lake, but unthinkable for European scientists.
2008 crisis was a black swan for many economist for totally predictable to at least 12: http://rwer.wordpress.com/2010/05/13/keen-roubini-and-baker-win-revere-award-for-economics-2/
“little incentive for the eurozone banks to make significant new credit available to either the consumer or the corporate sector”
Isn’t the problem on the demand side? From what I see, corporations and consumers in Europe were and still are deleveraging as much as they can. The simply don’t ask the banks for credit.
Would change probably if the interest rate which the ECB gave the banks would get a more reasonable mark-up. But then the margin for the banks wouldn’t meet their expectations.