Patrick Allen: Euro Zone
1. Euro zone debt crisis will get a lot worse.
As we enter 2012 the euro zone debt crisisenters a new dangerous phase in which money markets will freeze up. Fixed income analysts tell me they have gone from being very worried to “terrified” in the last few weeks. Inaction by the EU and ECB has driven up funding costs and increased the probability of core European nations like France being dragged into the crisis with only Germany or the ECB now able stop a run on the banking system and liquidity crisis. In the absence of major, big bazooka like intervention, the real crisis will hit in January 2012.
2. Weak banks will fail.
As the weakest institutions come under pressure, national authorities in the euro zone and beyond will have to take control of a number of banks. The cost of this, added to the liabilities being passed from the private the public sector, will add to the sovereign debt crisis . Like the Lehman Crisis in 2008, there will be major casualties that we cannot yet predict. The big question is who will be AIG in 2012?
3. The EU will act at the last minute.
The big bazooka will come at the very last minute. When RBSin the UK was finally nationalized following the collapse of Lehman, the then-Chancellor of the Exchequer, Alistair Darling, said it was 45 minutes from going under. The hard line rhetoric from Angela Merkel and the German authorities will mean similar stresses will be needed before the German Chancellor can sign off on a multi-trillion euro policy response needed to avoid the collapse of the euro zone bond marketand financial system.
4. Strong banks will clean up.
Once the bazooka has been fired, and it is very unclear what kind of bazooka could finally be fired, those with the ability to ride the ‘risk on’ rally to its full extent will clean up. Whether this involves riding the stock market higher, making huge profits on bond holdings made good by the ECB or EFSF or snapping up assets off rivals on the cheap, the winners will win big. At the end of the year, expect a number of big banks that win to be paying big bonuses to staff despite the screaming of politicians and voters.
5. U.S. debt will dominate.
When the dust settles on the euro zone debt crisis and a plaster has been attached to stem the bleeding, investors across the world will remember the U.S. federal debt is now over $15 trillionand rising fast. In an election year with votes to be won, nothing will be done to significantly lower federal spending, and the real-time debt clock will keep ticking higher. How this will be brought under control — whether U.S. debt is worth 100 cents on the dollar and how much that dollar is worth in euros, pounds, francs and yuan — will dominate as America heads to the polls.
The sun as always will rise in the east, and the woes of the west will see Chinese influenceincrease, even if their return on their dollar reserves does not.