Lending squeeze set to get tighter in coming years, says Merrill Lynch

BANKING WARNING:THE SQUEEZE on consumer, business and corporate lending looks set to intensify in Europe over the next two to three years, according to Merrill Lynch Wealth Management.

Bill O’Neill, chief investment officer for Europe, Middle East and Africa, said in Dublin yesterday that Europe faced a significant period of deleveraging, particularly in the banking system, although Ireland had already made significant moves in this direction due to the unique nature of the banking crisis.

Nonetheless, the continued deleveraging of the Irish banks this year to meet 2013 deleveraging targets would remain a drag on the economy, he said.

According to forecasts by Merrill Lynch Wealth Management – a Bank of America subsidiary since it took over Merrill Lynch in early 2009 – Ireland’s economic growth will be weaker in 2012 than last year, although this will not affect its ability to meet its fiscal targets under the bailout programme.

Striking a relatively upbeat note, Mr O’Neill said the biggest dangers to Ireland’s recovery were external rather than domestic.

Ireland should return to the bond markets as planned, he said, and would most likely issue short-term securities initially.

On the broader question of the euro zone debt crisis, the investment bank predicted greater intervention by the ECB, which last month launched its €489 billion liquidity operation.

“The ECB’s quantitative easing response is tiny compared to other central banks and will have to change in 2012,” the bank said. It noted that the ECB would need to commit €1 trillion more to take its action to the same scale as the US Federal Reserve’s.

“Some form of mutualisation of risk is also needed, such as common bond issuance,” Mr O’Neill added.

According to the bank, the euro zone economy will be in recession this year, while the US will see slightly slower growth, as a weak recovery in business spending limits expansion.

The bank also expects the euro to weaken further, perhaps hitting €1.20 against the dollar by the middle of the year, before recovering towards the end of 2012.

In terms of portfolio management and asset allocation, the bank said the traditional policy of diversification had been complicated by the fact that the number of “safe havens” was shrinking.

It predicted equities would modestly outperform corporate debt, and favours large caps, stocks that offered dividend growth and US and British shares.