Thursday, 29 December 2011


Global Investing


Insights behind the investment headlines

What if the euro collapses?
DEC 13, 2011 15:37 GMT
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.

Posted by Britannia Radio at 18:02