Situation will get worse before Europe finds solution: RBS

Yesterday, the German parliament approved the reforms in the Financial Stability Facility (EFSF). German vote in the corpus has grown from a facility EFSF 250000000000 € 440 billion.

According to Silvio Peruzzo, Europe economist at RBS, the situation is definitely worse before the solution can be found. In an interview with CNBC-TV18, Peruzzo, said a technical recession the euro zone may begin in Q4 this year. "Next year, we have a mild contraction in GDP in 2011 compared to the euro zone."

Below is the edited transcript of his interview with Sonia Shenoy and Latha Venkatesh, and CNBC-TV18. See also the accompanying video.

Q: The German vote has increased from Corpus 250000000000 EFSF facility of up to € 440 billion. It was known in the market. It is a duty, which Germany had already been given. But because of this commitment in July, the market has increased the need for much more, the expectations are much higher. What is the sum of EFSF, which gives the satisfaction of the market? 1000000000000 € Is this cool nerves in the market for a little longer?

I think you need to find the exact number is a measure of the extent of the challenges faced. I think the best way to do this is to look towards the bond market in the country such as Italy and Spain.

If you take a common outstanding bonds in Italy and Spain, then you are probably talking about the amount of 2 trillion. And it's far from where we are today. Now the important question is about to expand to such a large amount of EFSF it causes certain consequences for the AAA status of some of the larger euro zone countries.

Some recent proposals to increase the size of EFSF to go in this direction, using some form of leverage. But it's the only way we can see EFSF size as large a scale.

The market is a constant that Italy could lose his property. In this context, the best have to be able to finance up both countries. And I think it is commensurate with the outstanding bonds out there.

Italy alone has about 1.5 trillion. This is the third largest bond market in the world, you have to convince investors to big results.

Q: As you said one of the ways in which you can expand the size of the facility would EFSF or, if one can leverage, as well as the plan offered by Geithner. What problems do you see in the plan?

: There is a very, very big problems. I think the most important thing to me is related to the role of the European Central Bank. Now, all the proposals that were floated, it is about increasing the size of EFSF through some sort of leverage include the role of the ECB.

Now, the European Central Bank, we know, are forbidden to monetise government debt. I think that any influence EFSF, which runs through the central bank will be seen by the market and regulators, and potentially violating the Constitutional Treaty and the European Central Bank.

I think the step that must be available to achieve that size is very, very ambitious. I'm not sure at this stage whether we could really see this kind of event happening. And that's why I think the situation is definitely worse, before they find a solution.

Q: What about the whole European economy? Do you think there could be many or a lot of pressure on fears of recession across the economy?

I think definitely yes. We have recently changed their assessment about the prospects for the euro area business cycle. I think that the combination of falling demand, which for us is the main factor in the economic cycle. Also, the fact is that you may have noted that the persistent strains in financial markets affect the outlook for the euro area business cycle.

Now look for a technical recession which would begin in Q4 this year's quarter decline in the euro zone's GDP in Q4 2011 and Q1 2012. Next year, we have a mild contraction in GDP in 2011 compared to the euro zone. And this really consolidation, many countries do far more ambitious. We know that to bring back to a sustainable fiscal path, if economic growth is now negative is much more complex than what we've seen so far in many European countries.

Articles Source:- http://www.moneycontrol.com/news/fii-view/situation-will-get-worse-before-europe-finds-solution-rbs_592515.html