Stock exchange news. World financial markets is strongly influenced by rumour about European debt problems. According to Christine Lagarde, the Head of IMF, the participants of trading do not pay enough attention to the great effort that is taken in order to fight crisis. In her opinion, many fears are simply exaggerated.
According to the estimation of International Monetary Fund, potential loss of European banks, caused by the increase of debt crisis, can amount to about 300 bln. Euro, taking into consideration the fact that 200 bln. Euro from the sum have appeared since the beginning of 2010. What will be the consequences? Will debts increase rapidly, which is harmful to the world economy, or can something be done in order to avoid such drastic consequences?
Will world economy face recession, and Europe collapse?
According to the experts of Forex Academy and Masterforex-V Stock Exchange and Futures Trade (the best European project studying forex and exchange trade in 2009-2011), vulnerability of European bank system is one of the main reasons of deeper debt crisis in the EU:
■ European banks sink. In this reference, Academy’s specialists share the opinion of IMF Managing Director Christine Lagarde, who addressed the European Union at the end of August with an appeal to provide compulsory and urgent large-scale bank recapitalization. Miss Lagarde claimed that if this step is not taken, economical weakness will spread onto the leading countries of the region;
■ the role of EFSF. Recapitalization becomes the main requirement on the way of preventing the crisis chain reaction. In 2008 the government of the countries of EU could intervene in order to solve the banks problems; however, currently these countries are also facing problems, and banks need reorganization. At this point one of the options to solve the issue is to use the means of European Financial Stability Facility (EFSF);
■ risks increase. In order to increase EFSF volume and jurisdiction, a corresponding agreement is to be ratified. However, such mechanism may fail to protect Europe if the situation is worsened by problems in Italy and Spain . Moreover, according to the assessment of IMF, about one half of $6.5 trn. of common national debt of 17 countries of the Eurozone is exposed to high risk;
■ is ECB powerless? On September 16 European Central Bank (ECB) made a claim about the consolidation of efforts with major central banks of the world in order to provide European banks with dollar liquidity. However, ECB actions are positive only in a short-term period, which means that additional help will be needed. Larger means will be necessary, including the means of IMF as well as the means of creditors, including China;
■ political factor. The crisis has currently moved into another, more politicized phase. Financial markets do not believe that world leaders are able to solve these burning issues. Crisis of confidence has influenced not only economy, but the entire financial system. Improvements concerning financial stability, which have been received during last three years, have been brought to nothing;
■ pessimistic scenario. IMF predicts that economic growth in America will follow the basic scenario +1.5% in 2011 and +1.8% in 2012, in Eurozone – +1.6% and +1.1%, accordingly. If debt crisis follows one of the negative scenarios, worsening of credit terms will lead to the shortage of economic growth in Eurozone by 3.5%, in the USA – by 2.2%. Such turn of events will bring the USA and Europe into deeper recession.
Outcome from the situation. Concluding the abovementioned, the following key measures, which will become the life ring of world economy, can be defined:
- stabilization of bank system;
- strengthening of budget in the USA, Europe, and Japan as well as providing systematic shortage of state debt during the period of several years;
- shortening financial imbalance in developing countries and creating stable financial systems;
- implementing world reform on financial sector regulation.
USA and Europe: whose economy is stronger?
Both American and European economies are not currently having their best time ever. However, the United States, despite their enormous debt, look somewhat better, as perspectives of Eurozone are very vague: collapse is likely to happen; consequently, stability of single currency is questioned. Therefore, investments in American economy remain more profitable in comparison to Europe:
■ will EU cope? In long-term perspective, Eurozone will survive only provided that there appears a centralized budget system, and national features of its members do not hinder. Eurozone with one single currency and 17 independent finance ministers is unlikely to survive. It is too hard, especially taking into consideration the fact that only two strong countries – Germany and France – can undertake major cost loading. It is unknown for how long they will manage to pull other participants of the monetary union;
■ US benefits. The USA is also currently experiencing serious imbalance. Federal budget deficit has reached its limit during the recent years. However, in comparison to other countries, whose industry is developed even better, it is much lower than in Italy or Japan, for example.
In addition, American economy:
- has broad diversification;
- has the labour market that is well adapted to business and economic requests;
- is characterized by highest labour productivity worldwide due to high level of labour process automatization;
- has no bureaucratic barriers.
What perspectives do the United States have? Recent events make it clear that US administration has not only developed, but also is actively implementing its scenario of way out from crisis, which is based on world political cooperation. The country has all necessary resources and means for this.
Mid-term forecast. Barack Obama’s administration suggests to introduce budget stimulating measures, which will amount to about 3% of GDP. In its turn, FRS, has started the policy of cutting state bonds long-term interests. Consequently, in the mid-term financial markets and households will receive a strong impulse for their recapitalization.
The measures that taken by American government in order to stimulate national economy will influence not only US economy, but also world economy in general. Inflation is inevitable in mid-term period; it will be extremely hard in 2013-2015. Due to this process real debt of state, corporative, and private sectors in the world’s leading countries will considerably decrease. These factors enable a gradual shortage of global debt pressure during this decade.
What will happen to dollar and Euro rates in mid-term perspective?
As admitted by the analytics of the Department of Masterforex-V Trading System, Euro rate will maintain its long-term bear trend. Bear wave С of Daily2 level remains; its nearest level of support will be represented by 1.3150 point, exceeding which will clear the way to the next level – pivot MF at the point of 1.2873. Trend reversal can only happen provided that pivot MF and sloping chanel MF are covered (see the chart).
The Editorial Board of “Market Leader” magazine, jointly with the experts of Forex Academy and Masterforex-V Futures Trade and Stock Exchange, holds a questionnaire in the traders’ forum: will Euro and Eurozone manage to survive, having their current composition?
• yes, of course;
• Euro will survive, but some participants will have to be excluded;
• no, after one-two years of agony Euro will fall into oblivion.
