A synchronized deleveraging of banks and governments in Europe in the year ahead would have a huge impact on the global economy, says BCA Research.
In a research note, BCA points out that, “over the past decade, the pace of global leveraging has been an excellent predictor of the global economic cycle. Hence, a possible credit crunch in Europe will pose a significant headwind for global activity.”
BCA says that European banks have been given the choice of shrinking their assets, rather than raising new capital, in order to improve their solvency position. “At a time when it is prohibitively expensive to raise equity, banks are highly likely to dispose of assets,” it says.
Indeed, it estimates that US$1.2 trillion of debt could be pulled from the global economy next year, even based on mild assumptions, as Euro area banks stop rolling over maturing loans. This would represent a 2% drag on global demand, it notes.
BCA says the overall drag on global growth caused by Europe could be somewhat higher since the euro area crisis is also putting massive pressure on its governments to de-lever.
“Of course, changes in the U.S. and Chinese leveraging cycle could counterbalance the deleveraging from the euro area, or exacerbate the blow to the global economy. Either way, it is hard to see the global economy booming in 2012 unless Europe puts a credible line under its debt crisis. Until then, remain cautious on European risk assets,” it concludes.