What Could Trigger Fresh Euro Financial Crisis?

What Could Trigger Fresh Euro Financial Crisis?

Increasing long term interest rates, restructuring other countries’ public debts and divergent views on banking union could trigger a fresh financial crisis in the euro zone, feels Natixis.

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What Could Trigger Fresh Euro Financial Crisis?

Patrick Artus of Natixis in his recent economic research feels fresh financial crisis in the euro zone could break out for various reasons.

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However, the analyst notes for the time being, the financial crisis has been kept under control in the euro zone, thanks to periodic announcements by the ECB. Patrick Artus points out ECB’s announcements in June-July 2012 on the creation of OMT and the forward guidance provided by ECB during July 2013. The analyst observes these actions from ECB were followed by improvements in the financial markets.

Natixis’ analyst however feels these reactions from ECB provided only temporary relief to markets, though fresh financial crisis could emanate for three reasons.

Escalating long-term interest rates in the euro zone

Patrick Artus feel the ECB’s forward guidance is an attempt to protect long-term interest rates in the euro zone from the increase in the U.S. long-term interest rates.

Natixis analyst cautions with the weakness in the European economy, a rise in long-term interest rates in the euro zone, specifically in the peripheral countries, would adversely affect the economy and on public debt dynamics.

Restructuring other countries’ public debts

Patrick Artus notes several euro zone countries experience challenging public debt ratios. Dwelling deep into the aspect, the analyst finds with nominal growth and level of interest rates, several euro zone countries would require a primary fiscal surplus to stabilize their public debt ratios.

For instance, Greece would be required to have a primary fiscal surplus of a staggering 33 percentage points of GDP, while Portugal would require 11 percentage points of GDP. Other euro zone countries such as Ireland, Spain and Italy would require 2.2, 5.4 and 7.1 percentage points of GDP respectively.

The analyst notes when these primary fiscal surpluses of these countries are compared with those forecast for 2013, the countries’ public debt-to-GDP ratio would grow significantly in 2013. For instance, the analyst anticipates the public debt-to-GDP ratio for Cyprus would grow substantially by 35 percentage points.

Divergent views on banking union

Patrick Artus observes banks in the peripheral euro-zone countries are struggling due to rising borrower defaults. This is exemplified in the following chart highlighting the percent of non-performing loans for various euro-zone countries:



The above situation highlights need for recapitalizing the banks in several countries.

Natixis’ analyst notes there are divergent views on the functioning of the banking union. While the European Commission feels there needs to be a European bank resolution fund and the capacity for the ESM to directly recapitalize banks, Germany, Europe’s largest economy, prefers each country to remain largely in charge of the treatment of banking crises.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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