What if the euro collapses?

December 13, 2011

Even after the EU summit last weekend, asset managers seem not to have completely dismissed the idea of a possible euro zone breakup.

A closely-watched survey from Bank of America Merrill Lynch out on Tuesday showed a near 50-50 split among fund managers expecting a country possibly leaving the 17-member currency bloc.

And some of our participants at the Reuters Investment Summit last week put a high 70-75 percent chance of some countries leaving the euro zone next year.

Swiss wealth manager Sarasin reckons the impact will be a meteor striking the earth and offers following scenarios:

  • A run on the banks by savers keen to put their money into a core euro country would bring down the banking system of the departing country overnight.
  • Companies and private households would not have access to loans, nor would they be able access any more cash.
  • The state, which in this situation should support the banks, would be bankrupt as well. Financial markets would deny it access to funding.
  • The new currency, once it is introduced, would depreciate by between 30% and 50%, which would multiply the government’s debts.
  • The depreciation would lead to imported inflation and trigger trade union demand for compensation, setting off a hyperinflationary spiral.
  • The bankruptcies of banks in Southern Europe would bring about the downfall of their northern counterparts because the latter have lent them large sums of money in the belief that monetary union would last forever.
  • Anticipating an appreciation, huge capital flows would drive up the new Deutschemark. Many medium-size companies would become uncompetitive overnight.

“There are thousands of venues for how a meteor could approach earth and there are thousands of conceivable but unlikely scenarios how the euro could collapse which would substantially alter investors’ optimum positioning… Investors should know that there is no refuge from a euro collapse,” Sarasin’s chief economist Jan Poser says.

 

3 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Euro collapsing would actually be good for America. The flight to the USD would stabalize the value of the dollar. The bank run in Europe would also collapse the economy making our exports stronger yet again.

And on top of it all Europe will be demonstrating to America that socialism doesn’t work, so us Americans will turn our ship around and head back to economic freedom and vote out our marxist president and in with a new president who believes in the free market again.

seems like a Win Win Win situation for America.

Posted by cj_james | Report as abusive

Nice scenarios. I would expect EU politicians know them and would want to avoid collective suicide. Therefore I would put the probability of any country leaving (or being allowed to leave) the Eurozone rather lower than 70%. The German government hopefully now understands that the 50% devaluation of Greece’s debts was a very stupid and costly thing to do.

But I agree with Natsuko Waki that the Eurozone summit has not changed the situation very much. The resistance against a Germany dominated block is already growing quickly, as well as the resistance by the Bundesbank against the bailout plans through the IMF.

I just hope that the Eurozone leaders are now fully alerted and able to push through extreme (i.e. extralegal) measures very quickly when the situation collapses.

Posted by dingodoggie | Report as abusive

ummm…………. in case you don’t know which it seems you don’t. If the euro collapses it will be months if that for the dollar to go under as well.

Posted by justlitloldme | Report as abusive