Despite the surge the Euro received on Friday from the positive outcome of the European Summit, the accounting firm Ernst and Young has warned that the true fallout from the Euro crisis will strike in 2013.
Their report suggests that the balance sheet of many global banks will suffer a record contraction in the later part of 2012 and that the real impact of the European debt crisis will strike next year. The firm believes that some banks could see their balance sheets shrink by trillions of Euros leading to a record fall in the amount of lending. Bad debts will begin to bite and drag the currency down into a deadly spiral.
Ernst & Young’s Andy Baldwin said: “While the ¬effect of a combination of the det¬eriorating economy and the recurrent crises of confidence in the market on bank balance sheets in 2012 is worrying, the real impact will not be seen until 2013, when loan defaults will hit harder than many are expecting.”
The company believes that leniency from lenders to debtors is masking the true extent of the problem and could lead to a devastating crisis. You don’t have to look too far for an example of such leniency. The bailed out bank Bankia has consistently allowed Spain’s football clubs to put off paying off their loans and the same thing has happened in nation’s right across the Eurozone.
Marie Dixon, an economic adviser to Ernst & Young, added: “Non-performing loans are a ticking time bomb for the Eurozone economy. Larger firms will be able to draw down their cash balances or access alternative sources of funding, but smaller firms will struggle.”
In the currency markets the British Pound has fallen against the US Dollar following the release of Markit’s latest Purchasing Managers Index data. The report showed that manufacturing activity continued its downward slide for a second month in a row.
The data was better than forecast but was not enough to halt a slip. The Markit compiled data showed that manufacturing has increased slightly to 48.6 last month compared with May’s three year low of 45.9. Any figure below 50 shows a contraction. The rate of decline has eased but the level of output remains disappointingly low.
The report has added to the pressure on the Bank of England to introduce further monetary easing measures inflicting further pulls on the Pound. The market believes that the Bank will unveil the measures on the 5th of July to help boost and stimulate the country’s economy.
Unemployment also saw an increase and dragged on Sterling causing it to go down 0.2 percent against the dollar at $1.5668, off a peak of $1.5718 hit on Friday when the market cheered moves to ease the euro zone debt crisis.
The Euro has also seen a slide today as doubts linger over whether the deal decided upon on Friday can solve the crisis. The single currency lost its early gains trading down 0.1% against the pound to trade at the 80.52 level.
As a result, safe haven currencies such as the US Dollar and Japanese Yen are expected to see gains as investors start retreating away from the Euro. The longer time goes on that no clear evidence that the plan is working is sure to see the currency weaken further. The Pound is set to profit from the slipping confidence as investors regard the Pound a safer bet than the Euro.
The Pound to Euro exchange rate is currently trading at 1.248
The Pound to US Dollar exchange rate is currently trading at 1.550
The Euro to Australian Dollar exchange rate is currently trading at 1.240
The Euro to US Dollar exchange rate is currently trading at 1.242
The Euro to Pound exchange rate is currently trading at 0.801