The Certainty of Uncertainty in the New Year
The only certainty in 2012 is the uncertainty stemming from the financial challenges in the European Union, which are very likely to impact the U.S. banking system.
Expect 2012 to be a gray swan year, a year in which we know a certain risk is plausible, but we don’t know how it will impact the financial and banking industries. Unlike a black swan event, which is defined as a highly improbable and unknown risk, the gray swan of the banking industry is the financial uncertainty of the European Union, which is made up of 27 member countries, and most particularly the survival of the euro currency, which is used by 17 of those countries.
The instability of the EU financial system is a result of two main factors, one systematic and one cyclical. The systematic factor is the European sovereign debt crisis that was caused by runaway government spending in some European countries. For example, Greece, Portugal and Italy all have elevated debt-to-GDP ratios that, when coupled with the second factor, the burst of the housing bubble in Europe, made it even harder for these countries to grow their economies.
Economic growth is a must in order to reduce and stabilize debt-to-GDP ratios, especially for countries like Italy, which has nearly 2 trillion euros in outstanding government debt. Moreover, Italy has slim growth prospects in the near term because it first needs to reform its labor market. A similar, yet less drastic, situation exists in Spain, Greece, Portugal and Ireland.