Calm before the perfect storm in the eurozone?

Posted on 02 January 2012 with 1 comment from readers

The New Year holiday season is over today and financial markets resume. There is much business unfinished from 2011. The perfect storm that has been brewing since the crisis of 2008-9 is about to erupt.

This is most unlikely to be a boring year in financial markets. The volatility of 2011 almost certainly heralded a climatic event that cannot be far off now. Usually the most obvious thing happens to trigger these movements.

Italian bonds

For 2012 the most obvious point of weakness is the Italian bond market. Financial markets like to concentrate their action for maximum impact in a real life stress test. They will most likely go for the Italian jugular.

Force Italian yields up and it becomes impossible to finance the debt of the eurozone’s third largest economy. All those countries with bigger debts to GDP therefore also become insolvent by default.

How on earth would the eurozone authorities respond? There would be a bailout. But how and who and what would pay for it? We don’t know.

In such circumstances financial markets have no alternative but to discount the very worst possible scenario of a total systemic collapse. It might after all be the outcome.

So you should see financial markets tip-over in spectacular style as as we last saw in late 2008. This will look like the end of the world but later with hindsight prove to have been the best buying opportunity of the decade, if you know what to buy and have the money available.

We last wrote about perfect storms on ArabianMoney in late 2008. It is not correct to say that nobody saw that storm coming (click here). We got the stock market correction almost spot-on. We could see that in August 2008 (click here).

Perfect deja-vu?

Will this column be right again this time? We have the same conviction as a little over three years ago. All the forces of the perfect storm are in place and you really cannot see anything on the horizon to prevent it.

We also seem to be almost right on top of the storm now. It is the second stage of the financial crisis, the one postponed but not avoided by the bailouts of 2009.

The historical precedent from the early 30s is the collapse of the Credit Anstalt bank that followed a couple of years after the Wall Street Crash of 1929. But just as the past few years have not been as painful as the Great Depression, neither should the next be so bad.