Jeff Cox (CNBC) opines that the European debt crisis is likely to last a further 2 to 5 years as the dual effort to achieve both..
- Austerity in public spending
- A workable long term debt repayment (or forgiveness) plan for European sovereign debt
Both of these long term goals will inevitably require an adjustment phase. Italy, with its bond yield straddling 6-7% and its €1.9tn debt is a problem that won’t go away so long as the markets believe an Italian default is, at least, plausible. Sure, the disposal of Silvio “Bunga Bunga” Berlusconi as Italian PM and his replacement with the decisively less colourful, technocratic (and market friendly) two time European Commissioner Mario Monti, is certainly a stabilising factor (as Italy needs to pass a big reform package to reestablish credibility and lower its bond yield/financing costs to sustainable levels…around <5% from 6-7% currently).
However the problem is not financing, its solvency. The national debt of Italy might simply be a bridge too far to saddle on the average Italian citizen (as the Greek situation has shown). Volatility is caused by the uncertainty over the imponderables – those technical points that are being kicked down the road so as not to alarm the markets. Regardless, according to Cox, the ‘European Dilemma’ is being seen (perhaps simplistically) as a direct extension of the US financial crisis which begin in earnest with the collapse of Lehman Brothers in late 2008. The volatility we are seeing is because short term investors (traders) are very responsive to perceived changes in risk (and everyone seems to be dealing in the ‘short term’ at the minute). Right now, with the prospect Central Bankers intervening in markets (as the ECB does, buying Italian bonds) , a feared sovereign debt downgrade in France (and a Presidential election in April/May 2012) , a politically charged atmosphere in Washington DC (Presidential election in November 2012) coupled with the continuing austerity plans restricting growth, Europe will likely endure another “mild” recession in 2012.