More Fear Predicted for New Year in Europe

Markets are likely to have a hangover from New Year’s Eve when they re-open on Tuesday, as traders get back to their desks to a difficult prognosis for the year ahead, analysts and economists warn.

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The week since the Christmas holiday has been relatively calm as thin volumes helped protect against the swings which characterized much of 2011.

“The market may come back with fearful sentiment on the 3^rd of January and attack [the euro zone],” Nick Beecroft, senior markets consultant at Saxo Bank, told CNBC Friday.

“The euro zone faces continuing problems.”

The countries in the euro

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[EUR=X  Loading...      ()   ] area are facing another year of turmoil after 2011 saw trouble in smaller peripheral countries spill into Italy, the region’s third-largest economy. Many now predict greater fiscal union for the euro zone, as proposed at an EU summit earlier this month.

“The crisis is so bad that it can’t go on for another 12 months – something will happen,” Holger Schmieding, chief economist, Berenberg Bank, told CNBC.

“The crisis will abate more likely than not, because policy makers will take more forceful action if they really have to.”

German Finance Minister Wolfgang Schaeuble said he expects the euro zone will be stabilized within 12 months in an interview published on Friday with Handelsblatt newspaper.

There are growing concerns about a new credit crunch in the region after European Central Bank (ECB) data showed M3 money figures, which demonstrate how much is being lent to the private sector and are a key indicator for the economy, have turned negative since August.

“There’s a credit crunch going on in much of the euro zone,” Schmieding said.

“Market perception is that sovereign holdings of the banks are toxic.”

He believes that the ECB will eventually have to act as a “backstop” and provide greater support to the euro zone. There have been calls for the bank to act as lender of last resort for troubled euro zone countries to calm the markets, but its leaders have so far declined to do so.

The ECB was rumored to be buying up Italian bonds again after Thursday’s auction of 10 year Italian bonds, which saw fairly weak demand.

“You have to be careful not to read too much into what happens in this funny time between Christmas and New Year,” Beecroft said about the auction.