No longer an idle “what if” game, investors are actively debating the chance of a breakup of the euro as a creditor strike in the zone’s largest government bond market sends Italian debt yields into the stratosphere — or at least beyond the circa 7% levels where government funding is seen as sustainable over time. Emergency funding for Italy, along the lines of bailouts for Greece, Ireland and Portugal over the past two years, may now be needed but no one’s sure there’s enough money available — in large part due to Germany’s refusal to contemplate either a bigger bailout fund or open-ended debt purchases from the European Central Bank as a lender of last resort.
So, if Germany doesn’t move significantly on any of those issues (or at least not without protracted, soul-searching domestic debates and/or tortuous EU Treaty changes), creditor strikes can reasonably be expected to spread elsewhere in the zone until some clarity is restored. The fog surrounding the functioning and makeup of the EFSF rescue fund and now Italian and Greek elections early next year — not to mention the precise role of the ECB in all this going forward — just thickens. Why invest/lend to these countries now with all those imponderables.
Where it all pans out is now anyone’s guess, but an eventual collapse of the single currency can’t be ruled out now as at least one possible if not likely outcome. The global consequences, according to many economists, are almost incalculable. HSBC, for example, said in September that a euro break-up would lead to a shocking global depression.
A euro break-up would be a disaster, threatening another Great Depression. Cross-border holdings of assets and liabilities within the eurozone have risen dramatically, leading to a tangled web of mutual financial dependency.
With the re-introduction of national currencies, disentanglement would proceed at a rate of knots, undermining financial systems, generating massive currency moves, threatening hyper-inflation in the periphery and
triggering economic collapse in the core.
So world markets outside the debt markets in question should be suffering a paroxysm right now, right?