In 2011, the eurozone sovereign debt crisis was the dominant political and financial theme and this is expected to continue in 2012. All peripheral economies have started to implement structural reforms; however the benefits are for the long term while some financial investors are demanding short-term fixes, such as the European Central Bank (ECB) acting as the lender of last resort – something not currently within the ECB’s mandate. To avoid a potential credit crunch in the peripheral eurozone, the ECB has been buying government bonds from these countries in addition to providing extra liquidity to the eurozone banking sector. The banking sector also has to adopt new regulation by mid-2012 as Basel III requires a Tier 1 capital ratio of 9% for all major banks. The ability of banks to raise new equity is expected to be limited in these volatile times; therefore they will also need to adjust their loan exposure in order to be Basel III compliant. Real estate is a capital intensive industry and is likely to be affected by the banks’ loan book deleveraging process in particular.
Source : UBS AG