Double-dip recession warnings from Standard & Poor’s
Published 21/10/2011 | 11:58
THE EMERGENCE of a double-dip recession would mean a lowering of the sovereign ratings of eurozone bailout countries like Ireland and Portugal, according to new report from Standard & Poor’s.
The effects of such a recession would also hit the core tier 1 capital bases of the banks – the report showed the 20 European institutions would see levels fall below 6pc.
A double-dip recession and an interest rate shock would increase the increase the number of banks affected to 21.
Inferred in the report, entitled Stressing the system: assessing the capacity of the EU and IMF to support a eurozone under strain”, is that overall eurozone recapitalisations would cost about €130bn.
The report comes as Europe is divided on how to solve the debt crisis – particularly the two biggest economies led by French Prime Minister Nicolas Sarkozy and German Chancellor Angela Merkel ahead of a key summit meeting on Sunday.
Standard & Poor’s also assessed the funding capacity of the EU and IMF.
The current arrangements would be sufficient if the EU and IMF were to support 100pc of the borrowing requirements for Greece, Portugal and Ireland, and up to 10pc of the borrowing requirements of Spain and Italy.
However, under highly stressed conditions, there would be a shortfall of €287bn between the joint lending capacity of the EU support mechanism and the IM, representing about 2.7pc of the aggregate 2010 gross domestic product for eurozone member states."Although our scenarios take into account various debatable assumptions, we believe that they illustrate the likely general direction under given conditions," said Blaise Ganguin, Standard & Poor's Chief Credit Officer, EMEA.
"Beyond the likely downgrade of a number of sovereigns if such events came to pass, our scenarios suggest that current support mechanisms may not be sufficient if conditions deteriorate beyond current expectations."