KATHMANDU: A person in the financial field is well versed with the events of 2008, which triggered a chain reaction leading to the
global financial meltdown. The words such as sub-prime, coined during the period, will be etched forever in the minds of people afflicted by the crisis. Policymakers around the world have warned the global financial system that the summer of 2012 could spell doom for the global economy as the events are reminiscent of 2008. The only exception is that the mortgages have been replaced by the Euro Zone sovereign debt as the risky assets that the investors are anxious about.
Globally, banks are under stress and depositors have begun to grow wary of the prevailing situations. The European Central Bank (ECB), like the Federal Reserve in 2008, has sought to reassure markets by providing generous liquidity, but collateral quality is diminishing as better assets of the banks are being used up.
Analysts opine that Europe must be ready with more liquidity injections to contain the consequences of a possible Greek exit to prevent investors from fleeing in panic. If Greece does leave the Euro Zone, it could have similar consequences as that of the Lehman Brothers in 2008.
What is needed is a so-called ‘euro-sovereign’ guarantee of bank deposits and other liabilities, as the guarantees of some
national sovereigns are likely to be insufficient. The creation of Euro Zone bonds has been controversial with France’s new President Francois Hollande calling for the currency bloc to issue common bonds and Germany rejecting such a move on the grounds that it will weaken fiscal discipline. But analysts argue that time is running out and Euro Zone leaders may be nearing a ‘break-the-glass’ moment — when one smashes the pane protecting the emergency fire alarm. If a crisis does occur, the ECB may not have the ability to respond swiftly, fully and forcefully because of differences on the bank’s board.
A Greek exit would trigger a hit on confidence in other sovereign euro assets. Euro Zone leaders need to be ready. There will not be time for meetings. In panicked markets, investors flee to safe assets, sparking other flames! Whatever happens in the summer of 2012, one thing is for certain — it is a déjà vu once again.
(The author is assistant manager at research and development department of Mercantile Exchange Nepal. He can be contacted through firstname.lastname@example.org)