CREDIT SUISSE: THE 5 PROBLEMS NEEDING RESOLUTION IN EUROPE
Interesting conference call this morning from Credit Suisse on Europe and the outlook going forward. I’d say they do a nice job of breaking down the overall environment. In essence, they say the crisis is likely to deepen before forcing the hands of politicians in achieving what needs to be done. They offer 4 current scenarios for Europe with an 80% probability of the Euro staying together in its current form:
“we think there are four scenarios that could play out by the end of the year: We see the probability of a “Grexit” at only 20% and the probability that the Euro-area stays together in its current form at 80%:
(1) The Euro-area stays together in its current form (80% probability);
(2) Greece leaves the Euro-area without a complete Euro break up (10% probability)
(3) Greece and one or two other Euro-area countries leave the euro (less than 1% probability)
(4) There is a complete Euro-area break up (10% probability)”
Why won’t Greece leave? They offer 5 reasons:
“(1) An exit of Greece would come at a very high cost to Greece: GDP down 10%, inflation plus 30%.
(2) According to recent polls, 80% of Greeks want to stay in the Euro-area.
(3) Core European would face €220bn of direct losses from a Greek exit (and the indirect costs are clearly higher),
(4) A Greek exit would lead to €1.4trn of deposit flight from the periphery and maybe as much as €1.8tn overall-forcing immediately a huge E2trn LTRO, a ECB deposit guarantee or capital controls.
(5) There are clear signs of core Europe softening its stance on some of the elements needed to stabilise the situation in the Euro-area”
So where to next? Ultimately, they say there are 5 big hurdles that need to be resolved in Europe. We’re through 2 out of 5 and CS says we’re making progress on the others:
“We believe there are five factors that needed to be addressed to resolve the European crisis:
(1) A return to growth. To some extent this is the most important issue. With growth, fiscal arithmetic becomes more sustainable and the political willingness to accept the pain of restructuring becomes more bearable (though clearly some pain is needed to force restructuring).
(2) A current account balance in the periphery. The net borrowing of the economy as a whole is more important, we believe, than the net borrowing of the government sector. On current exchange rates we fear a 3% to 12% fall in wages will be needed to restore competitiveness and reduce the current account deficit, but with wages being half of nominal GDP that in turn makes the growth outlook worse.
(3) Questions over solvency need to be addressed (Greece and Portugal)
(4) Build a ring fence for the solvent. Being achieved slowly.
(5) Mutualisation of debt. Mutualisation works because in aggregate Europe has lower government debt and fiscal deficits than the US; the problem is the distribution of debt, not the amount of debt.”
If CS is right, and I’d say they’re probably not far off, the Euro crisis is likely to persist unless markets force the hands of the politicians sooner rather than later. At this point, I just about hope they do. It’s time for this crisis to come to an end….
Source: Credit Suisse
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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12 Comments
Couldn’t agree more and expect the market to force the politician’s hand sooner rather than later. I hate to use the term, but a “Lehman-esque” moment needs to transpire before this issue is finally resolved.
“A return to growth” – problem solved!
I love these solutions … I wish I had thought of them myself, lol.
By the way, in the history of credit crises, countries hardly ever get out of them by growth alone. It usually involves a great deal of pain and assets confiscation …
Gotta love this probabilities voodoo, makes it look more serious.
Colour me cycnical ,but “80%”,”10%” ! I know it’s nice to think you can quantify everything,but welcome to the real world where we cannot. I might as well throw a dart at a board and use the value obtained as rely on percentages such as these. Truth be told these guys have a job in part because the world wants to believe that there is a science capable of generating this stuff that will magically clear some of the fog of the future. If only.
Excellent comment.
Finance types who think they are doing God’s work based on pseudoscience. This far we got, oh the humanity!
Too much people trying to make a living by doing nothing productive, that productive we have become we can no longer invent real jobs.
A “return to growth” indeed would be fabulous. Unfortunately for that convenient strategy, the world economy is slowing quite a bit. Thus, the European Crisis can not be solved in the manner expected by CS.
First we stop turning to the politicians, financial institutions and unions for solutions. We make decide and then inform them what their fate will be.
You can not get the correct solutions until you stop relying on a snake to protect the mice.
I think there’s a 9.5% chance of a complete Euro breakup. Maybe a 9.6% chance.
Credit Suisse. Please. Excuse me while I puke.
If Europe to become the United State with fiscal union, then the EU must first unravel due to one member leaving. One’s exit will create turmoil in one’s domestic economy, such event will likely to cause deposit flight, and member nations and their banks will be forced to recognize hundreds of billions of losses. Only then, we will see a hope toward fiscal union.
The EU is “babylonic” they are unable to adress any sustainable solution!
Proof: They have been fighting for 39 years over the placement of their common patent facility. The germans can not let their taxpayers take on the debts of club med unless they change their constitution etc.
Of course 80% of the greeks want to stay in the Ruro. If they leave, the bailout goes with it, they won’t get their 50yr old retirement, won’t get their 4 weeks paid vaction or gov’t paid pensions. They need the Euro.
The Greeks cannot pay anything, do not want to pay anything and would be idiots to pay anything. Why on Earth they would pay 150B when they do not have to. Dignity, sense of honor, buaha,ha,ha!!
Greece will default and out- 100% – crush the world economy and they return to common sense on the Western hemisphere. ” Returin to growth..” these guys from Credit Suisse are technically trying to inflcit more pain into already weaken psyches.