A leading Australian economics report yesterday warned of a looming “Eurogeddon” with banks going bust and the world economy plunged into turmoil, possibly ending the mining-driven nation’s “charmed run.”
Though it was “marginally” more likely that the debt-laden eurozone would manage to fumble through its fiscal woes, the quarterly Deloitte-Access Economics Business Outlook said there was a real chance of a meltdown.
“The defining characteristic of this alternative scenario is that banks go bust,” the report said.
“It may not be as traumatic in 2012 as it was in 2008-’09 [financial crisis], but then again chances are that the global policy response won’t be as good this time either — governments are now too worried about debts and deficits to dig deep in response to any renewed crisis, while many central banks have already cut interest rates to record lows. The ammo cupboard looks either locked or empty,” it added.
The euro’s fate was the “key unknown,” with the possibility that one or more countries could drop or be forced out of the common currency bloc, heaping extreme pressure on financial institutions, the report said.
For now, the European Central Bank looked able to keep the “market wolf from the sovereign debt door” but the region was bound for recession, with budget cuts also hitting US growth hopes and China and India both slowing, it added.
Deloitte-Access warned against relying on China to “save the day,” saying the Asian giant’s budgetary position was shakier than it appeared, while both inflation and property prices — though easing — remained relatively high.
“If the eurozone has a terrible 2012, China’s growth may suffer more than it did last time,” the report said. “That combination means ... Australia’s charmed run could come to an end.”
Coal and iron ore demand would shrink, dampening prices and export earnings, with confidence likely to suffer and credit markets in danger of seizing up, sparking a blowout in unemployment and the budget deficit.
Australia was the only advanced economy to dodge recession during the previous global financial downturn due to resilient Asian demand for its abundant resources, which only experienced a shallow contraction and recovered rapidly.
EU finance ministers were set to meet in Brussels later yesterday to forge ahead with plans to implement a fiscal pact and finalize a treaty setting up a permanent debt rescue fund.
The ministers will also decide on the terms of a second bailout for Greece — the epicenter of the eurozone’s debt crisis — after private creditors refused to write down more of the country’s debt over the weekend.