E&Y: Risk of recession is one in five

THERE is a one in five chance that the Eurozone will go back into recession for the next two years, according to an analysis by Ernst & Young released this morning.

The looming threat of a credit crunch coupled with political indecision means that the region could well see its economy shrink two per cent next year and another one per cent in 2013, says E&Y’s head of financial services Andy Baldwin.

Euro ministers need to boost the firepower of their bailout fund “seven-fold” according to his team’s research to over €2 trillion (£1.7 trillion), in order to avoid catastrophe.

E&Y economist Marie Diron says: “The latest data already shows distinct indicators of recessionary risk as bank lending in the periphery continues to fall and the supply of credit to businesses tightens across the Eurozone.”

She predicts that a disorderly default of any euro sovereign would dent the supply of credit another six per cent on top of current trends.

Eurozone banks need to refinance €600bn next year – with Europe’s bank bond markets having effectively shut down for the last two months. Unless they can successfully renew their debt, the region faces a full-scale credit crunch.

Many corporates will instead turn to “the shadow banking system”, E&Y concludes – that is, they will try to directly access investment from private equity firms and investment funds.

Banks are in for a torrid season as they report results over the coming weeks. Many will have to revise their growth forecasts and could need to adjust their predictions about bad loan trends, which have been on a downward path since the financial crisis in 2008.

Economists at Lloyds cut their UK growth forecasts last week. Chief executive António Horta-Osório had told investors to see the bank as a proxy for the health of the UK economy.