Despite the outcome of the elections in Greece, Hollande's victory in France, the request for official help from the Spanish government and the openness shown by the European Council at the end of June, “uncertainty persists about the future of the eurozone. Consequently, financial market volatility is higher than it was at the beginning of the year, as are yields on peripheral bonds, while bank stocks remain at depressed levels”.
It is the concise but faithful portrait of the European financial situation, presented by the economist of Ernst & Young, Andy Baldwin, in the outlook for financial services.
A bulletin that provides, for the Old Continent, asphyxiated growth, starting from next year, of just 0,4%, while in 2014 the European product will expand by1,7%. No rebound, therefore, but a recovery increasingly similar to the American "jobless recovery", if one thinks that for 2015 and 2016, the team of economists led by Baldwin predicts a growth rate not exceeding 2,1%.
For 2012, on the other hand, the relatively good performance of some countries during the first quarter flattened the recessionary outlook on a -0,6% which hides the clear worsening of the climate starting from April onwards, as the "tachipirina" effect of Draghi's Ltro was reabsorbed.
It is above all the banking sector that pays the price, and we know where: in countries with high unemployment, bad debts weigh more and more among bank assets. The Spanish case speaks for itself, and the total collapse of the sector was avoided by the expansive policy of the ECB, sufficient to avoid a total credit crunch, as well as by the timing of the Government of Madrid in requesting a European bailout. The first tranche of 30 billion should start by July, which thanks to the agreements at the end of June will not weigh on the Spanish public debt.
But the European financial sector still needs a profound regeneration process, which inevitably will reduce credit to the real economy in the medium term.
In short, the downside risks remain, and with them the monetary policy moves can only remain anchored to interest rates close to zero for another two or three years.
As regards the banking sector, Ernst & Young expects eurozone banks to shrink their balance sheets to 1600 billion in 2012, following the disposal of non-core assets and the reduction of funding.
Downgrades by rating agencies will also continue to bite, and banks may respond by doing so less reliance on wholesale markets favoring the retail sector, accelerating competition between groups to attract deposits from account holders.
I non-performing credits, meanwhile, could increase from 5,6% of last year al possible 6,5% in 2013: Spain would be the most deviating from the average, with a percentage of non-performing loans equal to 9% of the total.
As for the industry corporate, lending will not return to pre-crisis levels before 2015, thus reducing investment. Loans to the sector, in 2012, will decrease by 4,8%.
Within insurance, net operating income, on average, may not return to pre-crisis levels before 2015 “thanks to a combination of low interest rates, low returns on investment, high cost of hedging, weak business volumes and higher capital requirements ”.
The growth of premiums (life sector excluded) should not reach more than 3% in the next 5 years. This will push companies in the sector towards more careful cost control policies, introducing new processes and improving efficiency.
