Banks’ balance sheets will contract by a record margin in 2012, further constraining the supply of credit to businesses and consumers, according to Ernst & Young, but the “real impact” of Europe’s debt crisis will not arrive until 2013.
The accountancy firm said banks will shrink their balance sheets by €1.6 trillion (£1.3 trillion) this year as the result of asset disposals and a contraction in their lending activity – a sharper decline than during the financial crisis.
As a result, it predicted that corporate lending will contract by 4.8pc in 2012, while consumer loans will fall by 6.6pc, which would represent the fastest pace of lending contraction on record for the eurozone.
However, next year looks even more “bleak” as the fallout from bad debts is felt across Europe, Ernst & Young’s Eurozone Financial Services Forecast said.
“Non-performing loans” – a debt that is either in or close to default – in the eurozone will peak at 6.5pc of all outstanding loans next year, a record high for the common currency, according to the accountancy company.
Ernst & Young’s Andy Baldwin said: “While the effect of … a combination of the deteriorating economy and the recurrent crises of confidence in the market … on bank balance sheets in 2012 is worrying, the real impact will not be seen until 2013, when [loan defaults] will hit harder than many are expecting.” Marie Dixon, an economic adviser to Ernst & Young, added: “Non-performing loans are a ticking time bomb for the eurozone economy.” She said leniency from lenders to defaulting debtors is “masking the true extent of their non-performing portfolios.
As the economy continues to worsen, a larger portion of these loans will be pushed into [default] status, forcing banks to realise their losses and constricting further lending. “Larger firms will be able to draw down their cash balances or access alternative sources of funding, but smaller firms will struggle.” Meanwhile, France will post a smaller growth in 2012 and 2013 than earlier expected, Finance Minister Pierre Moscovici said.
Growth in 2012 is now expected to reach just 0.4pc or less this year rather than 0.5pc, while in 2013, “an expansion within 1pc to 1.3pc … appears more credible” than the earlier forecast of 1.7pc, he said in an interview published on the Figaro newspaper’s website.
While Tanzania is under stiff budget debate, we should also focuss on the risks that we will face due to euro debt crisis, Our Economy depends more on exports of agricultural crops, the demand for such commodities will fall,leading to cancellation of orders by our trading partners hence falling of the stock prices. Farmers will be forced to sell at a loss and not be able to pay back their debts!
The eurozone crisis also will mean increase in funding costs and hence tighter Leanding Conditions. we all know our budget depends more on Donor funding and debts!
The list goes on and on. Let us have your views on How the Euro debt crisis will affect developing Countries like Tanzania.