Invesco’s Greenwood fears bank crisis could spark new credit crunch

Invesco ’s John Greenwood said problems in the banking sector could result in a second credit crunch.

The firm’s chief economist said if the eurozone sovereign debt crisis is not resolved there is potential for a squeeze on banks, which could lead to a Lehman-style credit crunch.

He said there is reluctance among banks to lend to one another, imposing a tightening effect upon the banks themselves, which is ‘what really caused the problems after the Lehman bankruptcy.’

His main concern is the ‘Eurozone crisis, specifically credit crunch in the banking system from the sovereign debt crisis itself.’

‘Ultimately we will see one or more countries exit from the Eurozone,’ said Greenwood. ‘We have two sets of economies with different rates of growth.’ He explained by putting these two ‘economies’ – the North and the South – together, it has caused a greater economic divergence among them.

He added: ‘The choice is whether there is short-term pain and then resumption of growth, repayment of debt and a partial default further down the track.’

Or, he said economies will face what looks like a decade of more stagnation. Ultimately this will come down to whether voters in the south say no to more austerity measures against voters in the north saying no more bailouts.

In this climate Greenwood expects the UK to see GDP growth of no more than 1%-1.5% in 2012 or 2013 given it is one of the most indebted of the major economies, 

The firm’s chief economist, who said last year inflation in the UK would come down, conceded he was wrong on that front and that it is taking longer to drop below the 5% mark than he thought.

He said elevated inflation levels were largely due to the VAT hike to 20% earlier in the year, the high commodity prices and the increase in sterling.