As the EU crisis continues to worsen a liquidity crisis becomes ever more probable

Inflationary and deflationary pressure has been an overlooked concept throughout the majority of discussions surrounding the Eurozone. While the central mandate of the ECB is to ensure price stability, the EU crisis continues to worsen and the likelihood of a liquidity crisis which could accompany is ever more eminent. The issue here is that ‘quick easy money’ is needed to help nations cover their debt, along with the risk that the ECB will turn to the Fed to print more money.

The €489billion offered by the ECB the other day is a concern as it is creating an era of perpetual debt. When something goes wrong for standard businesses, the business goes bankrupt and creditors swoop in. However, we are now observing that banks are in essence becoming ‘nationalised’ by governments, who are buying the banks’ debt to ensure their survival.

We cannot see much happening between now and year end and expect all markets to remain fairly level. However, the concept of inflation and similarly deflation is something to be weary of going into the New Year, as its impact on the euro can be profound if the ECB turns into a cash cow. The EUR/USD hit new lows yesterday and we do not expect much positivity, especially as the perceived riskiness of the EUR continues to heighten. USD strengthened off the back of better than anticipated data.

It has been an incredibly buoyant year for us here in the Eurozone and we think the worst is still yet to come!