January 4th, 2012
04:04 PM GMT
London (CNN) – I have an Financial Times cartoon on my desk by Banx which shows a man reading a book of "Greek Myths" to a child, with the tag line "...and the EU got all its money paid back in full." I don't cut out many cartoons but this one sets the tone for 2012.
We've known since October that Greece won't have to pay back all the money it has borrowed. Banks are already in deep discussions to reach a deal for a 50% "haircut" on some of the Greek government bonds they hold. Once that is agreed to, Greece is a step closer to getting some of the $168 billion loan - part of its second bailout - agreed by the European Union and the International Monetary Fund.
So what do we know going into 2012?
Let's be clear: A 50% haircut will not be enough. Greece's budget deficit numbers are getting worse, not better. Greece is not increasing the amount of tax that is swallowed up in the country's black economy. The Greek people face another $8 billion or so in austerity measures for 2013-2015, that is, if the coalition government of Lucas Papademos can pass the new measures through parliament ahead of the expected Spring election.
With the debt talks looming over the country, the government has started the new year by reminding its citizens the alternative. As a government spokesman, quoted in The Wall Street Journal notes: "we are out of the markets, out of the euro."
Could you imagine such a statement at the start of 2011.
In some ways, the markets seem to be sanguine about all this. Greece is, and will remain, a basket case within the euro. It will remain in recession, it will not pay back all the loans, it will need ever more transfer of funds from Northern countries to keep the euro ticking over. That is the price Germans and French taxpayers will have to pay to keep monetary union alive.
Speaking of France, we also know the country will soon lose its triple-A rating from Standard & Poor's. And this will come just months before a presidential election.
The markets have factored it in, surely, but I suspect stocks will fall heavily on that day.
Still, the Greece and France troubles are baked into the market numbers. So, what could be the greatest shock of 2012?
The rumblings in Hungary are worrying, and this non-euro economy could emerge as the problem child of 2012. Consider the huge rallies taking place as people worry about political freedoms - this, inside an EU country. Brussels and IMF might just refuse a loan which means Budapest will have to rely on funding itself through the markets.
Will Spain ask for a bailout? It doesn't need one for now, so why do some people believe unsubstantiated rumours that it wants a stand-by with the IMF?
Will the EU summit at the end of January enhance a split between the UK and the other 26, or, as I suspect, see more non-EU countries fall in line with Britain and not sign up right away to closer euro integration? Sweden and the Czech Republic already started that process before Christmas.
But the shocks in 2012 will not be a repeat of 2011. Things were said and steps were taken last year that could not be envisioned. The markets have a much higher tolerance for drastic steps by Berlin and Paris.
We also know that Europe is in recession and will remain so until banks increase their risk appetite.
Watch what European banks do. For now, they are parking their money at the European Central Bank. Until they start to use that money to buy shares, buy sovereign debt and start to loan to each other, Europe will remain sick.
At least the euro is weakening, which could help exports, and at least the United States economy looks set to grow faster than Europe, which could suck some of those exports.
Just like in 2011, it's all about confidence.
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