Credit Suisse warns of ripple effects from Eurozone crisis in 2012

Saturday, 10 December 2011 00:40 - - {{hitsCtrl.values.hits}}

Credit Suisse in its 2012 Global Outlook continued predictions for the Eurozone recession to continue next year but stated that it would not spread to the rest of the world even though ripple effects would be felt.

“We expect a recession in Europe, but not globally.

The risks are to the downside, and unlike our central forecast of de-synchronisation, those risks are globally correlated. We expect massive policy intervention. At the heart of our view is the conflict between eruptions of credit stress that since 2008 have become both regular and violent and the increasingly unconventional and aggressive efforts used by central banks to combat them. The effect is to suppress volatility until the next credit shock arises,” it said.

The report also pointed out that the euro area stands out for the enormity of its credit stress and for the European Central Bank’s (ECB) resistance to the vigorous response successfully employed by the Federal Reserve (Fed) and Bank of England (BOE) to alleviate its effect on the real economy. This route is leading to disaster.

To avert collapse, Credit Suisse expects the ECB to initiate a programme similar to the Fed’s and BoE’s early in 2012. Even in that best case, as investors, companies, and households take precautionary action, the organisation expects a euro area recession and believe that basic financial market functioning is threatened.

“We think that the loss of trust in political institutions will leave deep traces in the financial markets and ensure that the next leg in redefining the post-crisis global financial architecture occurs with a greatly diminished role for euro area financial institutions,” it said.

Credit Suisse also sees in the euro area a microcosm of a broader and powerful set of forces affecting all parts of the global economy and insists that the result could very well depend on a number of crucial points. The report goes on to mark them as challenges to the attitude of debt, wholesale changes to the structure of finance, European deleveraging, changes in terms of trade and low nominal interest rates.