Tuesday, 11 October 2011
A Binary market: Credit and Equity
All are terrified of the position that we are in with the Eurozone. The Euro going down will cause a -10% GDP recession across Europe lasting at least 3 years. Over e1.2 trillion will be wiped out during that time - along with many Banks. The European Governments will have to step in and support the banking system with unlimited free money - which itself may prove a tipping point for fiat currency as people realise there is no backstop for this.
The UK will of course get heavily dragged down, as is widely published, the UK exports more to Ireland than the BRIC's. Ireland will go down with Europe and so the UK gets landed with a heavy recession and 4 bust international Banks.
Who knows what the Equity markets will do - but the Credit Markets point the way, already pricing in a catastrophe that should have equity markets 15% lower than they are.
On the plus side, the magnitude of the disaster outlined above has really come home to the European leaders. MerKozy does not want to be the leader who broke Europe. Greece should not cause all Europe to fail, Italy and Spain, whilst in difficult trouble are not Greece. So there is some confidence that a deal will be struck. The new idea of a leveraged ETSF has gone down well....
BUT, all agree that the G20 meet in mid-November and a deal needs to be struck by then, not necessarily ratified, but struck in principle with difficult parties like Holland and Czech Republic signing-on. Time is short because that is one month away.
Success is another 2 years of flatlining and paying down the debt accrued from the years of plenty; failure is to repeat 2008, this time with no fiscal stabilisers - a binary outcome.