65% Chance of Banking Crisis by End November: Think Tank
Published: Wednesday, 9 Nov 2011 | 6:48 AM ET
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By: Patrick Allen
CNBC EMEA Head of News
CNBC EMEA Head of News
There is a 65 percent chance of a
banking crisis between November 23-26 following a Greek default and a run on the
Italian banking system, according to analysts at Exclusive Analysis, a research
firm that focuses on global risks.
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M. Lorden | Taxi
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A domino effect on banks is 65% likely following a Greek
default and a run on the Italian banking system according to analysts
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Having tested a number of
assumptions in a scenario modeling exercise, the Exclusive Analysis team warned
it is becoming less and less likely that EU leaders will simply “muddle through”
and have made some bold calls with clear timelines on when the euro zone will be
thrown into a major financial crisis.
The most likely outcome according
to their analysis is a sudden crisis in which the US, UK and BRICs
nations
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refuse to provide funding via
the IMF for the euro zone. In a world where predictions are made with no time
lines, the paper makes some bold predictions which can be held to account over
the next three weeks.
refuse to provide funding via
the IMF for the euro zone. In a world where predictions are made with no time
lines, the paper makes some bold predictions which can be held to account over
the next three weeks.
In the worst case scenario,
Exclusive Analysis expects the governments of Greece and Portugal to collapse
due to a lack of consensus on how to handle the debt crisis leading to social
unrest. German opposition to handing more funds to the EFSF
rises, leading Germany’s
parliament to actually reduce the money available to the bailout fund.
rises, leading Germany’s
parliament to actually reduce the money available to the bailout fund.
“In face of that, China and the
other BRICs give clear signals that
they will not support the bailout fund. The EFSF turns
to the ECB
, which refuses to print out
the amount of money the former needs to bailout the PIIGS. In face of the EU's
failure to boost the EFSF, the European banks refuse to accept the 50 percent
haircut on the Greek debt. Both the IMF
and the ECB suspend payments to
Greece,” said the report released on Tuesday evening.
, which refuses to print out
the amount of money the former needs to bailout the PIIGS. In face of the EU's
failure to boost the EFSF, the European banks refuse to accept the 50 percent
haircut on the Greek debt. Both the IMF
and the ECB suspend payments to
Greece,” said the report released on Tuesday evening.
Between November 18-22, French
debt, under Exclusive Analysis' most likely scenario, is downgraded leading to
the interbank lending market freezing up with new governments in Greece and
Italy “faced down by protestors in their attempts to implement more
austerity”.
Civil unrest follows in Spain
following the
election of a new government which pushes through even tighter austerity
measures, and Portugal announces it cannot meet
financial targets putting its bailout cash from the IMF and ECB at risk.
“Increased fear that these
economies will default creates bank runs in Greece and Portugal and
a
downgrade of French sovereign debt from AAA to AA.
EFSF is subsequently downgraded to AA+” said the report.
“The spreads applied to the debt
of all PIIGS increase with yields on Italian bonds
reaching 7.3 percent. In a second contagion
effect, depositors in Spain and Italy fear a banking crisis in their own
countries, which end up creating a series of bank runs and a collapse of the
interbank credit market as banks know that most of their counterparts are at
risk. Greece defaults.”
reaching 7.3 percent. In a second contagion
effect, depositors in Spain and Italy fear a banking crisis in their own
countries, which end up creating a series of bank runs and a collapse of the
interbank credit market as banks know that most of their counterparts are at
risk. Greece defaults.”
This doomsday scenario comes to a
head between November 23-26 when Greece leaves the euro to print money and
rescue its banking sector. The new currency falls quickly and depositors lose
out as their investments are converted into the new local currency.
“The government default on the
sovereign debt
and the banks default on their
foreign debt, which causes a banking crisis across Europe. Italian bond yields
rise and exceed 7 percent and the country faces bank runs, in face of which the
government freezes deposits and defaults on the sovereign debt”.
and the banks default on their
foreign debt, which causes a banking crisis across Europe. Italian bond yields
rise and exceed 7 percent and the country faces bank runs, in face of which the
government freezes deposits and defaults on the sovereign debt”.
So far so scary. For those looking
for some hope, the Exclusive Analysis report predicts a 25 percent chance that
the EU will continue to muddle through. In this scenario new
politicians in Greece, Italy and Spain are given some
breathing room by voters to find new solutions to the crisis until the end of
the year. Portugal still fails to meet its fiscal targets, putting its bailout
cash at risk, and French debt is still downgraded on prospect of Greek debt
default.
“However, the new governments in
Italy, Spain and Greece are given a honeymoon period by protestors and euro zone
counterparts, which prevents a market rout.”
In January and February, Greece
defaults but the fallout is contained as a new deal on 70 percent haircuts is
agreed. Spanish and Italian bond yields hit 7 percent.
“Civil disorder continues in
Portugal and Spain, reducing their ability to implement austerity packages.
Sovereign ratings in Spain and Italy are downgraded and the prospect of rescue
feels imminent as far as analysts are concerned,” warns the report in its
muddle-through scenario.
“However, the UK and US
governments reduce their objections to the use of IMF resources to fund the
EFSF, which, together with a Greek default, improves market conditions and halts
the rise in yields on the Italian and Spanish debts.”
With Spain and Italy entering IMF
programs, the debt crisis rubbles on in 2012 and 2013 before things turn nasty
as Greece defaults and recreates the drachma.
“Markets close to Italy and
Portugal again towards end-2012 and civil unrest resume, starting off a second
cycle of crisis and speculation about the future of the euro zone.”
If that is the muddle-through
scenario, then we are in for a very nasty end to 2011 and years of euro zone
debt crisis. But Exclusive Analysis does predict a 10 percent chance that the
crisis is resolved.
In this good news scenario
Greece still defaults before the end
of the year, but “stronger political leadership in
other PIIGS contains the fallout”.
“New governments in Italy, Spain
and Greece are given a honeymoon period by protestors as they attempt to
implement more austerity; a real sense of national unity is constructed with
respect to the crisis.”
The new governments are seen as
more credible and the US, UK, IMF and BRICs agree to make more funds available
to the EFSF.
“The new ECB head is persuasive of
the need for the ECB to purchase more bonds from national governments. Greece
defaults in November, but under the new technocratic government the process is
orderly and banks agree to accept 70 percent haircut on their credit. France
recapitalizes its banks and suffers a sovereign downgrade,” said the report.
In the first two months of 2012
France and Germany reach an accommodation on ECB lending and fiscal rules which
means the ECB becomes a lender of last resort in return for statuary limits on
the amount the so-called PIIGS can borrow, a condition demanded by Germany.
“Market conditions improve and
PIIGS bond yields decrease following these successful negotiations. Italy and
Spain are emboldened by their lower yields and by the Franco-German pressure to
negotiate a restructuring of their debt with creditors with a view to smoothing
and lengthening the maturity profile.”
Exclusive Analysis will join
Worldwide Exchange at 10:10 BST/5:10 ET to discuss the report and will be joined
on set by Jim Rogers of Rogers Holdings.
© 2011 CNBC.com
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