The German Chancellor Angela Merkel says there’s no “big bang” miracle cure, but hopes that Europe is edging towards a solution have buoyed stock markets. The FTSE has rallied nearly eight per cent since the Washington summit and the DAX and CAC40 are up nearly 15 per cent in the last three weeks.
That rally has been based on the broad outline of a plan centred around three things: a more credible restructuring of Greek debt, including private sector involvement of 50 per cent or more; a big recapitalisation of banks – €200bn or more – to deal with it, and devising a scheme that leverages the firepower of the EFSF from €450bn to €2 to 3 trillion to protect the debt of other peripheral countries. There will also need to be measures to try and boost growth.
But that’s the easy bit, because at the back of every investor’s mind is the thought we could be facing a big fall. To avoid disappointment, leaders will not just need to announce a plan, they will need to provide exact details on how each component will work.
And lest they dither, former Lehman banker Larry MacDonald’s note reminds us what’s at stake. HSBC says if the euro broke up it could mean a repeat of the Great Depression. The reintroduction of national currencies and legal ambiguities would rattle markets. Peripheral nations could suffer hyperinflation as their currencies plunged, while the core economies would be hammered by surging exchange rates.
If Greece left the euro first, UBS suggests its new currency would drop 60 per cent and local borrowing costs would jump at least seven percentage points. The cost in that country would be as much as €11,500 a person in the first year.
If Germany quit the euro UBS says its new exchange rate would surge 40 per cent and interest rates two percentage points. Banks would require recapitalisation and trade would slide 20 per cent. Each person would lose up to €8,000 in the first year.
Credit Suisse reckons the S&P 500 would tumble to around 750 and company earnings would slide as much as 45 per cent. They have assigned a 10 per cent probability to a euro breakup.
No pressure then. The clock is ticking.
Ross Westgate is co-anchor of CNBC’s Worldwide Exchange.