Europe’s debt crisis could tip the world economy into recession

According to the International Monetary Fund, Europe's debt crisis has the potential to tip the world economy into a recession. The organization even cut its global growth forecast from 4% to 3.3% and warned it could be as low as 1.3% this year.

Oksana Teplinskaya, Kate Ryzhkova
Jan 30, 2012 17:57
Voice of Russia

Europe’s debt crisis could tip the world economy into recession, says the International Monetary Fund

Russian offshore oil and gas reserves could more than double within the next 15 years

Iran could terminate oil sales to Europe in the nearest future

Europe’s debt crisis poses a threat to the world economy potentially tipping it into a recession, said the International Monetary Fund. The organization cut its estimate for global growth for this year from 4% to 3.3% in November, warning that the figure could drop as low as 1.3%.

IMF chief economist Olivier Blanchard said last week that “the epicenter of the danger is Europe but the rest of the world is increasingly affected. There is an even greater danger, namely that the European crisis intensifies, and in this case the world could be plunged into another recession. With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track. These measures can be taken, need to be taken, and need to be taken urgently,” Blanchard concluded.

The IMF stressed that the debt crisis threatens to spill over to the US and emerging markets. Bloomberg reported that such a development will require a bigger financial firewall, more bank recapitalization and limits on bank deleveraging, which exerts additional pressure on the economies of these countries. Among the emerging markets, Eastern Europe is “particularly vulnerable” as the region has heavy inter-linkages with Western European banks.

The organization is calling for swift action by European politicians to resolve the situation in the union. The bloc should use its Global Financial Stability Facility in order to contain worsening financial situation, the IMF recommended. “To establish confidence, it would be highly desirable to increase the size and flexibility of the facility at the earliest possible opportunity,” the organization said.

Russia among other countries stands ready to provide loans to the IMF to enhance its bailout resources. The country’s senior officials, including Finance Minister Anton Siluanov, reiterate that they are prepared to step in, but want other states to provide financial help too. RT television channel quoted Siluanov as saying that “We are ready to consider the issue, if other participants would also make a contribution, it would be more effective.” Russia is ready to provide up to $15 billion to the fund.

The head of the fund Christine Lagarde said earlier that the organization is seeking to raise additional $500 billion to ensure sufficient reserves available for countries struggling with the effects of the euro zone crisis.

Russian offshore oil and gas natural reserves could more than double in the next 15 years, if the country follows Brazil’s example in attracting foreign investment, stated the Bank of America corporation. The bank reported that Russia could quite possibly add 6 billion barrels of proved and probable reserves, as well as gain additional revenue and a higher valuation for its oil and gas producers.

In a report prepared by the bank’s Merrill Lynch unit, analysts cited inaction as the largest risk to developing offshore reserves in the country. Russia restricts development of fields in its waters to state companies, though it’s considering adjusting the laws to allow more firms into offshore exploration to form ventures for field developments.

Merrill Lynch recommended that, like Brazil, Russia should take active steps to allow private companies into licensing rounds for offshore reserves. Also the country should consider forming joint ventures with foreign partners and adopting “a comprehensive, clear and sustainable” tax regime. “We do not believe that status quo on taxation or one-off tax breaks are enough to attract adequate investment to the industry,” reported the bank’s head of Emerging Europe, Middle East and Africa Oil and Gas Research Karen Kostanian.

In another twist in the Iranian oil dispute, Iran said it could terminate oil sales to Europe already this week. The threats came as Iranian officials repeated their intention to re-engage in negotiations with the Western states over its nuclear program.

Last week the European Union decided to boycott Iranian oil starting from July 1. The delayed start of the boycott will give European importers time to arrange alternative sources of supply and avoid abrupt disruptions in the market that could cause a price spike.

And the global oil major Royal Dutch Shell already predicted the EU Iran sanctions as pushing up oil prices. Shell is considered one of the biggest consumers of Iranian crude oil. Its chief executive Peter Voser said in Davos on Friday: “We’re a European company and therefore we’re affected by the sanctions and we will obviously oblige and implement the sanctions.” Answering the question who would benefit or lose from the EU measures against the Islamic Republic, Voser said: “From a pure commercial prospective, the losers are consumers because at the end of the day it gives us more volatility and upwards pressure on the oil price.”

Iranian officials have said that the sanctions will have no effect on the economy and they will find other willing buyers. And analysts also say China and Russia stand to gain the most and western oil firms and consumers will emerge the biggest losers of the EU’s oil ban against Iran.

The Iranian oil ministry had also earlier downplayed the effects of the US and EU’s unilateral oil sanctions against Tehran, and said such embargoes will merely harm the European economies and oil consuming countries. European sanctions against Iran’s oil exports will affect the world economy and hurt European and non-European countries, the statement said. “The hasty decision by EU states to use oil as a political tool will have a negative impact on the world economy and especially on recovering European economies, which are fighting to overcome the global financial crisis”, it added.

However, this debate comes at a time when Iran’s economy and currency are under increasing pressure following a series of other economic sanctions that already have been imposed. The rial has shed about 50% of its value relative to the dollar over the past month, a decline that the central bank governor attributed at least partially to the “psychological effects” of the U.S. sanctions.

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