The sovereign debt crisis in Europe continues to intensify, and there’s no solution in sight, warns BMO Capital Markets.
In a research note, BMO reports that “markets are reeling” as the eurozone crisis has now seemingly spread to Germany, with a bond auction failing there and yields rising in response. “This has sent shock waves through the global financial markets, taking down stock markets, gold, commodity prices and the euro,” it notes.
Despite the broadening crisis, there is no sense that a convincing solution is imminent. “It could be done, but not without the kind of leadership that is willing to risk personal damnation to support the sovereign debt markets, recapitalize the banks and ease liquidity pressures to prevent a deeper economic contraction,” it says. But there is no sign that this sort of leadership exists in Europe at the moment.
“The political situation is fluid and flammable and thus very difficult to predict, raising the level of uncertainty and risk,” notes BMO.
It says the only way out of the immediate crisis is for much greater bond buying by the European Central Bank, and fiscal reforms in the most troubled countries. At the same time, recent economic data is suggesting that Europe is back in recession.
“The crisis is expanding and evolving fast. North American investors should not panic, as many high-quality assets are beaten down in this environment that will prove, ultimately, to have been a buying opportunity. Nevertheless, the crisis can worsen and continue for some time,” it warns.