The sheer scale of eurozone bank deleveraging makes even flat growth in 2012 appear to be an optimistic forecast, Threadneedle’s chief investment officer (CIO) argues.
Recent research by analysts at Barclays Capital estimated that eurozone banks will need to raise between €500 billion (£430 billion) and €3 trillion by June 2012 to meet the European Banking Authority’s new capital requirements.
Threadneedle’s Mark Burgess (pictured) warns: “The scale of bank deleveraging in comparison to euro GDP is vast and will be a profound headwind to growth in the region.”
European bond yields will face upward pressure as banks redeem their government bond portfolio to raise capital, he adds. This will have a further knock-on effect on the growth, creating the real risk of the continent becoming locked in a “vicious downward cycle”.
“Last week we downgraded our forecasts to 0% growth for 2012, but already this is looking optimistic,” Burgess says. “The prospect of a lost European decade is a very real one.”
The CIO also says the prospect of growth in the UK is “not good” against this backdrop as the country will suffer from a lack of activity in the eurozone, its largest trading partner.
Yesterday, Reuters reported that senior officials at European Union finance ministries are worried by the potential effects of bank deleveraging on economic growth.
A document seen by the news provider reportedly says: “There are serious concerns about a possible inappropriate deleveraging by banks when implementing the measures that would prejudice an adequate supply of lending to the real economy or put excessive additional pressure on sovereign debt.”
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