As Christmas cheer descends and world markets quieten for the holiday period, concerns over the unresolved eurozone debt crisis continue, but what are its affects on our financial well-being?
With fall-out from the eurozone crisis having seeped into many corners of the global economy in 2011, to what degree Australia has been and could be affected further, is ‘the $64,000 question’.
The ripples created by Europe’s economic instability are lapping at our shores, and nowhere more so than in the investment market, says Michael Karagianis of MLC Investment Management.
“The most obvious example of this, is the deterioration of equity markets since April, in particular, the flow of money going into cash and high-grade bond markets,” says the Sydney-based strategist.
With 15 per cent having been knocked off Australia’s ASX 200 share index in 2011, Karagianis says the movement into cash, (‘capitulation’ as its known in the industry), has been one of the main indicators of investors’ concerns.
“This is part of a world-wide move to reduce equity exposure. People have reached a certain pain threshold, and they don’t want to experience any more.
The problem is, you’re not going to generate enough returns by being in cash long-term in Australia, particularly with interest rates being cut.
“Some investors are moving into property, but I think that’s a dangerous move, because property in Australia is a very precarious ‘asset class’, and it could be one of the worst performing over the next few years.”
On Super funds, Karagianis says that with the Super fund industry moving to minimise its exposure to risk, defending itself against any further deepening of the euro crisis, “there’s no risk in terms of funds failing”.
“The obvious effect of this is the disappointing investment returns that investors continue to get. Increasingly investors are moving into a stage of their life-cycle where they need to draw down on capital or use income from their superannuation, and that becomes more and more problematic.”
Karagianis believes there may well be light at the end of tunnel for investors, depending on the eurozone’s ability to remedy the debt crisis.
“Things could get markedly worse of markedly better,” he says.
“We could see a sequence of policy responses that actually see investment markets significantly improve in 2012, but equally we could see things continue to unravel.”
Karagianis emphasises that it is the European banking sector which continues to face the greatest risk of exposure if the crisis deepens.
“European banks have been told to raise capital as they’re under capitalised. If Greece was to default and Italy gets into trouble, some of the banks in Europe would become insolvent.
“In the GFC, we saw the Australia banking system was unaffected by that crisis, and the system is still in a pretty good situation, as long as the property market doesn’t fall over.”
Bendigo and Adelaide Bank (BAB)’s recent acquisition of Bank of Cyprus Australia (BOCA) for $130m, a move that was actively sought by BOCA, is another indicator of the local impact of the euro crisis.
In a statement last week BOCA said that “challenging economic conditions in Europe” meant that the bank was unable to “take advantage of growth opportunities sought in the Australian market.”
The acquisition by BAB will now allow for such growth, says Australia’s only Hellenic Bank.
Following the acquisition, BOCA which is described as having a conservative risk profile with 99 per cent of its loan book secured against property, will operate as a stand-alone subsidiary of BAB.
The acquisition is a win-win deal for BOCA and its parent company. The sale of BOCA is in line with plans by the Nicosia-based Bank of Cyprus Group to strengthen its capital position and its liquid funds.
Cyprus’ largest lender needs to raise 1.56 billion euros to meet capital rules set by the European Banking Authority in the wake of eurozone instability.
The regulator has ordered European banks to reach a 9 per cent target for core capital after marking their holding of sovereign debt to market prices.