A bit of contrarian thinking here from Credit Suisse. 10 reasons not to worry about the Euro. Naturally, I disagree:
(1) No political party is suggesting that any country should leave the Euro.
(2) The weak Euro is a critical part of the survival plan. If the Euro weakened to parity (quite possible) this would boost GDP by nearly 2%.(3) The help packages announced amount to nearly 80% of government debt in Spain, Portugal and Greece.
(4) The cost of Spain, Greece and Portugal exiting the Euro could easily be $400bn (this is because European banks have $1.3trn of assets in these countries and with net foreign debt of 70% to 90% of GDP, a sharp decline in devaluation would, we think, lead to a loss of around 30% on these assets). If this is the cost for core Europe of a country exiting the Euro, then surely core Europe should spend this amount to keep the countries in the Euro.
(5) Peripheral Europe can accept more deflation than investors realise (Ireland and Latvia GDP are down by 20% from peak).
(6) The ECB has already done two U-turns already, so a third (open-ended QE) is quite possible (we note that the ECB balance sheet has expanded by 60% since the start of the credit crisis).
(7) The SNB has joined the ECB in QE. Last month it bought around €40 to €50bn of European bonds/bills without sterilising (Why? SwFr denominated loans in EMEA).
(8) Spain is critical (11% of Euro GDP and $1.1trn of global banks assets in Spain). We calculate that even if the bank bail-out is as bad as Thailand/Malaysia in 1997, total government debt would end up at 90% (from 66%) which is still OK.
(9) Greece restructures when it is safe to do so (2011 onwards), we think. Each year, European banks make $300bn of pre provisioning profits. A Greek debt restructuring would cost about $100bn (and probably they would extend maturity profiles and allow banks not to mark it to market if the bond is paid back at par).
(10) It is only in Greece and Spain’s interest to leave the Euro and default once they are running a primary budget surplus (i.e. a budget surplus before interest payments). They will not be in this position until 2012 and 2014 respectively.