Eurozone: A nightmare scenario

[dkf]

http://www.ft.com/cms/s/0/80094624-e076-11e0-bd01-00144feabdc0.html#axzz1YAbv4mwD

Angela Merkel’s staunch defence of the single currency, made in the Bundestag this month, is widely shared by other European leaders. The German chancellor’s sentiment demonstrates the political will not to let Europe’s sovereign debt crisis undermine the single currency.

So long as this level of political capital is invested in the euro, monetary union is highly likely to survive. However, the talk among investors and some European politicians this week has been of Greek default. The graphic below outlines the likely consequences of a default by Greece. It is a description, not a prediction – a description that includes the possibility of the break-up of the eurozone, though even in the event of Greek default that outcome is far from inevitable.

Plan A, as far as European authorities are concerned, is to implement the agreement struck on July 21. Under the deal, Greece was offered a second programme of loans, worth €109bn, including the guarantee that Athens would not need to return to financial markets for years, borrowing instead from other European countries and the International Monetary Fund at low interest rates. The private sector would take a writedown of its debt to help ease the burden facing Greece. And the European financial stability facility – the temporary bail-out fund – would become more flexible in order to limit contagion from one eurozone country’s bonds to others.

By 2013, the replacement permanent European stability mechanism should be in place to provide greater economic governance in the eurozone, and as a fund to ensure that countries with difficulties borrowing in the markets had rapid access to loans alongside adjustment programmes until they were again able to roll over their debt in the markets.

That is the plan. But in the meantime, something might give – such is the unpredictability of events in a crisis. In those circumstances, Greece could default. A momentous decision not to service its debts – owed to other European countries, banks and the private sector – would start an alternative, and potentially dangerous, sequence of events.

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The graphic mentioned in the piece is a good one. Very eye opening.

[Turbineguy]

1. The problem is made worse by

derivatives traders. If that component was taken out the instability would be reduced.

[dkf]

2. I think the problem is beyond that.

I wish it were as simple as limiting derivative trades.