Good stuff here from Joe Weisenthal at Business Insider via Nomura:
Scenario 1: The “Ahead Of The Curve” Outcome
Odds: Just 5%.
How it could happen: If Europe quickly expanded and enhanced the EFSF, allowed haircuts and restructuring of debt, and the ECB cut rates, alongside a path towards fiscal union, the EMU would survive with little impairment to long-term growth.
Scenario 2: The “good muddle-through” base case
Odds: 40%. How it works: The EFSF is successfully implemented, Spanish and Italian yields come down as their solvency becomes credible and European banks are recapitalized. In this case, the EMU survives, but long-term growth robustness remains in down.
Scenario 3: The “bad muddle-through”
How it works: The ECB does not do enough to reduce yields, Spain and Italy lose market acess, forcing a massive tripling of the bailout fund. In the end, it’s very painful. Ultimately, the continent must continue working towards more fiscal union.
Scenario 4: Disorderly default within EMU
How it works: Greece defaults on its debt eithe rdue to a bad Troika outcome or due to a failure of countries to ratify the July 21 bailout. The ECB stops supporting the Greek banking system, but it mooches off the EFSF to survive. Greece enters a deep 10-20% recession, and policymakers are forced to triple the size of the EFS to prevent a crisis in Spain and Italy.
Scenario 5: Partial or total EMU Fragmentaion
How it works: Greece leaves the eurozone after a default. Within this 8% odds there’s a 2% chance that Spain and Italy leave too.
I’d personally place higher odds on the bad muddle through scenario. Recent discussions still make it clear that they’re not going to allow a disorderly collapse. So I think the worst case scenario can be removed (for now). If I had to venture a guess here I’d say that Europe will likely continue to muddle through with the various policies they currently have in place. They may alter them to some degree, but they won’t make the necessary push towards monetary sovereignty of some sort. That means the markets will continue to push Europe around until they do something that is workable in the long-run.
The good news is that they appear to be understanding the gravity of the situation. The bad news is that they can’t seem to put together a real solution. In the end, I think we’re going to be forced into some sort of event that makes the current scare look benign. And when it happens the EMU will be forced to break out a bazooka. That bazooka will involve some form of Euro TARP, Euro bonds or some other move that leads to a true resolution of the problem of sovereignty. The good news is that if they are scared into action we will see a true end to the EMU’s crisis as they begin the path towards a real fix. Until then, this crisis will fester.
Source: Nomura via Business Insider