The Pictet Group has released its outlook for the world markets for June. The report reveals a compelling line of logic that will surely resound in the markets in the coming days. Beginning with the premise that Greece is too politically fragmented and dissenting to elect a fully functioning government, the report reveals a poor future for Europe’s economy. NOTE: these are the views of Pictet Wealth Management, which do necessarily represent those of Pictet Asset Management.
Founded in Geneva in 1805, Pictet is today one of Switzerland’s largest private banks, with assets under management and custody totalling USD 359 billion (CHF 336 billion / EUR 277 billion) at the end of December 2011.
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Greece, as it showed in previous elections, is incredibly politically fragmented at the moment. If the next round of elections manage to put a government in power it is unlikely, looking at the results of the May elections, that they will be pro Europe and pro austerity. That leaves the Greeks unwilling to implement austerity measures.
If this comes to pass, the report predicts that the IMF will stop funding its share of the bailout package due to Greece. The next round of funding is worth 30 billion euro and contains 25 billion in financing for bank recapitalization. A drop in the funding will present serious risks to Europe as a whole.
The lack of funds for recapitalization will leave at least some Greek banks insolvent. The ECB is currently not allowed to fund insolvent banks. This will leave a hole in the European banking system and form the next major decision point for Greece.
The European Union could decide to abandon the struggling nation or they could continue to do what they’ve been doing all along. Greece could be offered longer term targets and greater flexibility in order to ensure that their collapse does not bring down the entire union.
The coming crisis in Greece is going to be one of the biggest to hit Europe in some time. It comes right on the heels of Spain’s banking crisis leaving little rest for bureaucrats in Brussels. This will be a defining moment for Europe as a monetary and political entity.
That assessment leaves the report asserting that political decisions in Europe will be the most important factor in determining the prices of assets in the coming months. There is some little bright side on Europe’s future still offered by the reports.
The latest problems have led to a greater acceptance of European integration among many in the region. That may lead to longer term solutions to the problems such as the introduction of Eurobonds and more integral political centrality.
Germany also seems willing to accept more pain in exchange for European stability. The report points to statements made by officials from the German Central Bank who say they would accept an increase in inflation in the Germany in order to promote stability across the union.
Europe’s problems are the most pressing in the world right now, as this report attests. There is very little room for manoeuvre as money flows based on the decisions made at the top of that economies political structure. Greece is the most important point now, as Spain’s problems have been solved albeit temporarily.
There will be other crises in future if an holistic solution to the crisis is not agreed upon. That is what European leaders should be concentrating on.