Bank SNORAS: European Financial Stability Teeters on Razor Edge
OREANDA-NEWS. October 25, 2011. The global market participants lift up their voice more and more that uncertainty due to the USA economy, the debt of the European countries stops the growth of economies, and recession is likely to occur. The nervous setting in the world will probably influence the Lithuanian economy as well – it will either grow insignificantly or will also get into the recession grip, reported the press-centre of Bank SNORAS.
It seems that more signs appear that the fears of the global economy recession will likely become reality – International Currency Fund (ICF) diminished the forecast of the entire global economy growth from 4.3 per cent down to 4 per cent this year. And in 2012 the economy growth should go down to 4 per cent. Furthermore, the USA Central Bank also begins to speak about a significant contraction of this largest global economy. Sullen grey clouds gather over emerging markets as well – the China economy development dwindles, while the forecast of the gross domestic product (GDP) growth of Russia, rich in abundant natural resources, has been reduced from 4.8 to 4.3 per cent this year.
As the probability of the global recession is increasing and the European debt fever is not ceasing, governments will have to come to grips with the challenges, how to find resources and in what ways to finance their exacerbating social problems. While the economy growth is going down, it is usual that the level of unemployment is going up. On the other hand, large pressing debts of countries, especially in the Southern European countries, will force to diminish the budget expenses. Such combination of circumstances makes tasks of the governments very complicated.
European financial stability has been teetering on the razor edge for some time already. It seems that some especially large European banks receive financing from the financial markets where uncertainty reduces trust among financial institutions. It determines fewer opportunities for borrowing money, thus the scenario of the autumn of 2008 starts repeating itself in the financial markets, when panic muzzled markets and countries had to intervene so that the finance system would survive.
Greece continues to remain the fear axis of the euro zone. Banks, as the September data show, have already made provisions for the securities of Greece, thus admitting that these investments have lost some of their value. However, the fear of the market participants grows – a probable bankruptcy of Greece may bring about consequences for other euro zone countries and for the banks operating in them. Therefore, the EU banks greatly suffer due to the uncertainty prospects – during the past 3 months financial institutions have almost failed to attract longer-term monetary funds. According to the data of “Wall Street Journal” as of the end of September, the amount of EUR 34 billion, attracted by the EU banks, was the lowest during the past 10 years.
The European Central Bank makes all steps so that the system would not collapse and would guarantee funds for those banks which need them. Moreover, the situation is also aggravated that, let’s say, the devalued debt securities of Greece or other Southern European countries determine losses which must be compensated by the banks’ capital. As a result, some European banks will have to increase the capital. In fact, presently it is difficult to do it due to the nervous situation in the financial markets – the European institutions are preparing to help banks with the capital nationwide.
Are there signs of the approaching recession in Lithuania?
The unstable situation in the financial markets and the global economy losing its momentum will make an impact on the Lithuanian economy as well – it will either plunge into recession or will grow very poorly. Furthermore, in the deposits market, it is probable that competition will be on the increase, if the situation of 2008 repeats, when the Lithuanian banks, belonging to foreign financial groups, began more actively compete for the local financial resources due to the stagnation in the financial markets. However, what gives us hope is that we have made better preparations for the second crisis and the help mechanisms have already been created.
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