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The European debt crisis has not gone away [ClearOnMoney]
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The European debt crisis has not gone away

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Commentary

The European debt crisis has not gone away

24 Jan 2012 by Jim Fickett.

With the European debt crisis not much in the headlines these days, and with sovereign yields somewhat lower, one might wonder whether the ECB's three year loans to banks have fixed the problem. Not really, no.

It is true that market sentiment is better, and that might be all that is necessary to avoid a crisis in the short term. But significant dangers remain. The IMF published today an update to the Global Financial Stability Report, in which they see a significant danger of a negative feedback loop, in which banks, retrenching in the face of sovereign default risk, reduce lending, which deepens the incipient European recession, which worsens the situation for bank balance sheets.

January 2012 Market Update: Deeply into the Danger Zone

Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems. European policymakers have outlined significant policy measures to address the medium-term issues contributing to the crisis, and some of these have helped to improve market sentiment, but sovereign financing remains challenging and downside risks remain. If funding challenges result in a round of deleveraging by banks, this could ignite an adverse feedback loop to euro area economies. The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro area crisis, and some have homegrown challenges to the removal of financial tail risks, including overcoming political obstacles to achieving an appropriate pace of fiscal consolidation. Developments in the euro area also threaten emerging Europe and may spill over to other emerging markets.