We are approaching a “trouble triangle” of problems that require the European Central Bank (ECB) to act swiftly to resolve them or risk a deep economic contraction, according to Ralph Silva, a Director at research group SRN.
“Speed is critical on averting Spanish and Italian sovereign crisis, the ECB is the only mechanism to fix the problem as a European consensus is simply too slow.
The ECB's involvement is a good thing” said Silva in an interview with CNBC on Friday.
“We are approaching a "trouble triangle", Spain and or Italy needing more money, citizens in fear and refusing to spend, and a banking industry refusing to lend.
If all this happens in the next three months, we will see a deep economic contraction” said Silva.
Following a 500 point selloff on the Dow that saw heavy selling of nearly every asset expect short term safe haven bonds, Silva is advising people to diversify their portfolio geographically, but admits finding a port in the storm anywhere on the planet is no easy task.
“European banks are showing strain on all fronts, investment banking is near a standstill, trading volumes are slow, corporate demand has slowed to a trickle, small- and medium-sized business are to risky and retail customers are avoiding debt,” he said.
“While the banks are managing defaults much better and most are focusing correctly focusing on efficiency, overall, we have more problems on the way.” Despite high capital ratios Silva predicts that any buffers will disappear very quickly if we get a sovereign debt crisis.
“We only have a dozen banks in Europe that you can truly consider "safe", the rest will survive or die based on their ability to raise funds quickly simply because the aptitude for investing in banks is limited,” he said.
“The only solution to the banking issue at this point is dealing with the oversupply of banking products.
Europe needs to see a third of the banks disappear so the other can prosper,” said Silva.