Current Situation - Five First-Quarter 2012 Flashpoints for Europe:

The euro-zone crisis subsided for much of December 2011, but it may return with a bang early in 2012. Here are five key risks investors should have on their radar in the first quarter.

First , Greece aims to conclude its "voluntary" bond swap in January 2012, chopping €100 billion ($130 billion) off its debt and over time reducing the debt-to-GDP ratio to 120% from more than 160%. However, it's not clear that enough investors will sign up, potentially throwing the swap and Greece's bailout into disarray. Even if they do, the fear remains the deal doesn't do enough. The International Monetary Fund may yet conclude Greece's debt is unsustainable and stop lending.

Second , European credit ratings are set to fall. Standard & Poor's downgrade 14 euro-zone countries, and Moody's also plans to revisit its sovereign ratings. While much of the focus has been on France's triple-A, a greater risk may face Italy, which may fall to the triple-B category. Not far from junk, that could knock some of the country's debt out of bond indexes and increase collateral margins charged on Italian bonds, further constraining investor demand.

Third , Europe's bailout mechanisms will be in focus. The European Financial Stability Facility has failed to boost its firepower through leverage and has seen investor demand wane, but will need to issue bonds to fund Portugal. In March 2012, euro-zone governments will discuss the €500 billion cap on the EFSF's successor, the European Stability Mechanism. There will be pressure from the likes of Italy to boost the size of the fund, potentially causing even more intergovernmental friction.

Fourth , Eastern Europe may yet stir fears about bank exposures and increased political tensions within the wider European Union. Hungary in particular is cause for concern.

The government, in the face of vocal opposition from the European Central Bank , the European Commission and the IMF , on 1.6.12 ratified a bill that reduces the independence of the National Bank of Hungary, giving government-appointed officials more sway in monetary-policy making. That poses a risk to Hungary's access to markets and complicates talks with the IMF .

Fifth, with euro-zone policy driven by consensus, there is always the chance of unexpected moves from hard-line countries such as Finland, which held up the agreement on bailout funds in 2011. The first quarter of 2012 will also see the political focus move to France and rhetoric gear up ahead of April's presidential elections.

Incumbent Nicolas Sarkozy has been trailing Socialist Party candidate Francois Hollande in the polls; a change of government could generate fears of further delay and renegotiation in dealing with Europe's problems.

Of course, investors will also have to absorb a constant flow of data from Europe's economies, bank earnings and government-bond auctions. With banks deleveraging and governments trying to reduce their debt burdens, there is the real risk of weaker countries facing serious economic contractions—spooking markets over their ability to tame deficits. The one thing investors can be guaranteed of is that the December lull won't last long into January (Source: The Wall Street Journal, 1.3.12).

Eoin Treacy's view The above points are all potential issues that may encumber efforts to stabilise the Eurozone's debt markets this year. Brinksmanship between the Greek government and its creditors remains a concern and highlights the risk of an unruly default. However, all of these problems are to one extent or another known to investors. What has changed in the last month is the attitude towards the crisis at key institutions such as the ECB.

Just about everyone understands that there are no easy solutions to the sovereign debt crisis. Jilted creditors can block access to the international debt markets for a prolonged period following a default. Argentina is a relevant example. Greece may well face such an eventuality. Much will continue to depend on how amenable it is to the bailout troika's austerity demands. In the face of this much publicised threat it is important to appreciate that everything possible is being done to support the Eurozone's banks and various sovereigns.

The spread between 3-month US Dollar LIBOR and 3-month Euro LIBOR has dropped to 59 basis points which is quite a bit less than the interest rate differential between the Euro and Dollar. This suggests the US Fed is making as many Dollar swaps available as are needed.

The Eurozone's equivalent of the TED spread (3-month Euro LIBOR - 3-mth German government bond yields) has pulled back sharply in response to the ECB's €450 billion loan package in December. This is the largest reaction since the spread's breakout in July and suggests a positive response to the latest attempt to support the financial sector.

While Greek yield curve spreads (10-year - 2-year) show little respite, corresponding measures for Italy, Spain, Portugal, Ireland, France and Belgium have all bounced emphatically indicating a loosening of monetary conditions for the respective countries.

The Euro Stoxx Banks Index is a laggard but has at least stabilised above 80. A large number of challenges still confront the sector but the more accommodative tone emanating from the ECB is a positive. A sustained move above the 200-day MA, currently near 120, would be required to suggest a return to medium-term demand dominance.

The pace of the Deutsche Bank Euro Trade Weighted Index's decline picked up in November and December and the Index is now somewhat overextended relative to the 200-day MA. It has paused in the region of 120 and potential for a partial unwind of the recent decline has increased. However, a sustained move above 125 would be required to begin to question the consistency of the medium-term downtrend. A weaker currency will be welcomed by the region's globally oriented exporters but posed a challenge for commodity importers.

Investors are increasingly aware of the problems facing the Eurozone. A conclusive solution will take time to evolve. Domestic growth is likely to remain elusive as long as economies remain austerity focused. However, what has changed over the last month is that the ECB has become more solution oriented. In the latter half of last year the debate was on whether the ECB would engage in quantitative easing. It looks like we have our answer.