With the end of September now fast approaching, the Business Monitor International (BMI) said it believes that time is running out for EU policymakers to take a decisive step to allay market fears of a disorderly debt default by Greece, which would likely involve a much bigger haircut on outstanding debt ahead of key debt rollovers in October, and likely send systemic shockwaves across the European banking sector.
BMI began to suggest in August that the eurozone debt crisis is entering a decisive phase, and that we would soon discover potentially in a matter of weeks if the European Monetary Union (EMU) would survive in its present form.
According to BMI, there are a number of assumptions which underpin their outlook with respect to a possible endgame for the eurozone debt crisis.
BMI’s view that Greece will default on its debt has not changed since early 2010. The market appears to have little doubt about this eventuality, and is in deep distress as the need for debt restructuring has still not entered the political vocabulary in Brussels and Berlin.
Decisive action from policymakers will require an ‘epic crisis’, according to the BMI, which believes that market action over the past few days strongly indicates that such a crisis is now with happening.
That said, according to BMI, the question remains, however, how much worse will it need to get before meaningful measures, such as debt restructuring and bank recapitalisation are on the table.
With the troika negotiations involving the EU, ECB and the IMF over the next tranche of financial aid for Greece delayed until October, BMI said it believes that the probability of a Greek debt default being announced before the end of the month is between 30-40%.
BMI reaffirmed their view that the eurozone will survive, despite the suboptimal nature of the EMU, any alternative to maintaining the currency bloc intact would result in an extent of capital flight and financial market isolation, to deem an exit from the eurozone as unlikely.
As a current account surplus economy, the eurozone on aggregate has the means to put an end to the ongoing debt crisis, in the opinion of BMI, noting that rumours of Chinese or Japanese involvement in bailing out troubled European sovereigns are overdone, and an unlikely solution.
Even with the introduction of further austerity measures, the release of aid funds and an expansion of available bailout options, such as increasing the size of the EFSF and introducing euro bonds, implementation risk will remain high and thus markets are likely to remain volatile for a prolonged period, the BMI said.