Eurozone sovereign debt crisis hitting buyouts hard

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Centre for Management Buyout Research (CMBOR) report said on Monday private equity dealers seem content to sit on the fence until the euro zone is stabilised and debt market improves enough to support higher prices. The findings suggested that the situation has led to a deadlock in new deals and sale of companies between rival private equity firms, an activity that can often account for around half of transactions in the industry in a year.

The study also showed that the value of European buyouts totalled to about 9.1 billion euros ($11.3 billion) in the second quarter, a 34% fall in the first three months of the year, and almost 60% down against the second quarter of last year.

While the European leaders aim at solving the region’s debt crisis, the global financial markets continue to face a turbulent week. Recently, Italian Prime Minister Mario Monti lashed out at certain “Nordic” countries for sabotaging the decision to use the eurozone’s bailout fund to help countries like Italy and Spain, which still face prohibitive borrowing costs despite implementing tough budget cuts.

Italian and Spanish borrowing costs were at dangerous levels, with Italian 10-year bond yields climbing above 6% and Spanish bond yields finished at 6.97%.

Five of the euro zone countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate the required economic growth to pay back bondholders the guarantee it committed. Although these five countries were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole.

European banks remain one of the largest holders of region’s government debt even though they reduced their positions in the second half of 2011. Banks are required to keep a certain amount of assets on their balance sheets relative to the amount of debt they hold. Due to crisis, there is the possibility that a series of bank failures will spiral into a more destructive crisis.

Political implications

The affected nations who tried to put forth austerity measures and budget cuts, that led to public outcry, resulted in the removal of political parties in power. At the cross border level, it led to tensions between fiscally sound countries and higher-debt countries. Germany pushed Greece and other affected countries to reform their budgets as a condition of providing aid, which led to elevated tensions in the region.

Middle East and North African oil-based economies are expected to be more affected by the European crisis since they are closely linked to Europe. The geographical proximity and close historical ties, MENA oil importers’ exports have close links with Europe, which on average accounted for about 50 to 60% of their exports since the 1970s. The crisis is expected to affect the macroeconomic environment in the region through the effects on oil demand and its impact on public spending, foreign reserves, trade balances, inflation, financial markets and credit conditions.

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