–EMU Leaders Must Still Do More

ZURICH (MNI) – The Eurozone debt crisis has growing adverse impact
on the global economy and financial market sentiment by causing bank
deleveraging and hampering capital flows into emerging markets,
Institute of International Finance Managing Director Charles Dallara
said Tuesday.

“The sovereign debt difficulties in a number of European countries
are having a growing impact on the global economy and on sentiment in
financial markets. The crisis is contributing to bank deleveraging,
which is damaging the prospects for both growth in Europe and for
capital flows to emerging markets,” Dallara said.

The IIF said that it estimates that net commercial bank flows to
emerging markets declined to $137 billion in 2011 from $162 billion in
2010. For 2012, the IIF projects a sharp further fall in bank flows to a
total of $38 billion. A pick-up to $96 billion is expected for 2013,
provided there is no further escalation of the Eurozone crisis.

“Progress has been made by euro Area leaders toward stabilizing the
sovereign debt market. However, the leaders, who are due to meet next
week, need to do still more at the national and regional levels to
restore market confidence on a sustained basis,” Dallara said.

The IIF report noted that increased perception of counterpart risks
have lead to funding difficulties for banks in Europe. They need to hold
more liquid assets.

“This has prompted European investors and lenders to drastically
cut back outward capital flows and sell assets held in emerging markets.
This in turn reduced the supply of external financing in emerging
economies and weighed on financial confidence.”

According to the report, new European Banking Authority capital
requirements have further exacerbated that trend.

IIF chief economist, Philip Suttle, said, “Expectations of a
protracted adjustment process in the euro area lead us to think that
outward investments are likely to remain weak.”

“We anticipate that tensions in Europe will subside only
gradually,” he said. “We currently forecast a mild recession for the
region, with output contracting at a 1.5-2.0% annualized pace from the
final quarter of 2011 through the first half of 2012, followed by a
sluggish resumption of growth.”

-Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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