Friday, 18 December 2009

Finding A Better "Compass"

The extraordinary remedial actions taken by central banks and governments since late last year have been successful in restoring confidence in, and improving the resilience of, financial systems around the world.
Despite the recovery in financial markets and improved financial performance of euro area LCBGs (large and complex banking groups), there are several grounds for caution in assessing the outlook for financial stability in the euro area. In particular, the main risks identified outside the euro area financial system include the possibility of:
  • vulnerabilities being revealed in non-financial corporations’ balance sheets, because of high leverage, low profitability and tight financing conditions;

  • greater-than-expected household sector credit losses if unemployment rises by more than expected;

  • the surge of government indebtedness raising concerns about the sustainability of the public finances, as well as the crowding out of private investment; and

  • an adverse feedback between the financial sector and public finances as a result of financial system support measures, fiscal stimuli and weak economic activity

Within the euro area financial system, important risks include the possibility of:
  • renewed financial strains and that the recent recovery of bank profitability will not prove durable;

  • vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries being unearthed; and

  • a setback for the recent recovery of financial markets, if macroeconomic outcomes fail to live up to optimistic expectations.
SO a very important article from the ECB that highlight the great uncertainty that lies ahead. In particular, the risk of a renewal of the financial crisis which could endanger a very weak stabilization.

In the meantime, the Finnish finance ministry has published its growth forecast. First it cannot predict accurately the growth on a 6 month horizon but it is confident enought to highlight that 2011 will see growth , contrasting fully with the cautious view of the ECB.
"According to a new forecast by the Ministry of Finance, the recession has bottomed out... With the improving prospects, the ministry has raised its forecasts for economic growth in 2010 to 0.7 percent, up from 0.3 percent in a previous forecast. In 2011, growth is expected to accelerate to 2.5 percent.", YLE
In any case, I strongly urge to make your investment decision on the view of the ECB. In addition, I would like to highlight that since no one knows how the situation will turn out (due to massive intervention and its associated inability to identify the strengh of its recovery)...I will advise to just be an observer: watching how it develops and wait for better opportunity in case you are planning any investment.

Having said that, anyone takes its own decision and this is only my view and the one I will follow.

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