Europe Faces Five Major Risks In The First Quarter Of 2012

First quarter of 2012

First, Greek bond replacement and aid programmes may be disrupted.

Greece intends to complete voluntary bond swap in January, reducing the size of its debt by 100 billion euros, and gradually reducing its debt to GDP share from 160% to 120%.

But it is not clear whether there are enough investors to participate in the plan. If participation is not enough, Greek bond swap and aid programs will be disrupted.

Even with enough investors, the market is concerned that the plan is not enough to solve the problem.

The International Monetary Fund (IMF) is still likely to come to Greece.

Two, European credit rating may be downgraded.

Standard and poor's may downgrade 16 euro zone countries, and Moodie plans to re evaluate the sovereign rating it grants.

Although the main concern of the market is the French AAA rating, the greater risk is in Italy, where the rating may be reduced to BBB, which is not far from the junk level. This will lead to some bonds being ejected from the Italy index, resulting in higher margin requirements for the country's bonds and further inhibiting investor demand.

Three, the European rescue mechanism may cause friction.

The European Financial Stability Facility (EFSF) failed to leverage its firepower to reduce interest among investors, but EFSF still needs to issue bonds to help Portugal.

In March, governments in the euro area will discuss the issue of capital ceiling for Euro stability mechanism (ESM) 500 billion euros after EFSF expires.

At that time, Italy and other countries will call for the expansion of ESM capacity, which may lead to increased frictions between governments.

Four, Eastern European countries may raise concerns about the bank's exposure to the EU and the escalation of political tensions.

Hungary is particularly serious.

The Hungarian government passed a bill in December 30, 2011, which will weaken the independence of the Central Bank of Hungary and allow the officials appointed by the government to have greater say in monetary policy.

This led to an oral opposition from the European Central Bank, the European Commission and IMF, which threatened Hungary's market financing channels and complicate negotiations with IMF.

Five, the euro zone may postpone the introduction of further crisis solutions.

On the one hand, despite the fact that the euro zone policy is in line with public opinion, it does not exclude the hardliner countries like Finland suddenly obstructing.

On the other hand, the political focus will shift to France in the first quarter of 2012.

The French presidential election will begin in April, and incumbent president Sarkozy has been lagging behind Socialist candidate Hollande in the polls.

If the socialist party comes to power,