Expert: Toxic debt must wait for US and European elections

Europe will need to pile up its toxic debt (AFP Photo / STR)
A relief package for all of Europe would mean vacuuming up all of its toxic debt into one big pile and letting businesses go their normal way. But this won’t be the choice for cautious politicians ahead of the elections across Europe.

Soon the ECB might have no choice but do what the US fed did and write a cheque for at least a trillion euro, or maybe 2trln euro to completely recapitalize the banking system in Europe. It would take out all of the toxic debt and then manage that as a separate pool of assets, Chris Weafer, the  chief strategist at Troika Dialog, explained to Business RT.

But until the Presidential elections in the US, and Angela Merkel is re-elected as  German Chancellor, the authorities won’t be taking such painful and radical steps, Troika Dialog expert added.

Basically Europe will remain fighting fires and inject new money into infected economies, with a more permanent decision unlikely to come until 2013, Weafer suggests.

Since it’s difficult to imagine a worse scenario for Greece that it is currently following, the bigger issue now is what happens to the market for Credit Default Swaps (CDS), should Greece suffer a technical default, Weafer explained.

“If there’s a technical default, it completely undermines the whole CDS market, which is the basic risk insurance on the bond market globally,” which is a multi trillion dollar business, says Weafer.