In this presentation SEB's experts highlight three possible scenarios for the coming 6-12 months regarding the European sovereign debt crises:
1) Quicker than expected relief;
2) Muddling through (main scenario); and
3) Heavy turbulence and default in some countries.
1) Quicker than expected relief (probability: 15%)
Consolidation measures on track in Greece and Ireland. Portugal will recieve support. Spain manages without but international pressure forces them to implement further budgetary savings. A stronger than expected international business cycle eases the situation somewhat for both troubled and not so troubled countries in the euro zone. The market focus decreases eventually as investors are convinced that necessary reforms are on the right track. Key factors are a decisive German/EU/ECB/IMF strategy ahead, offensive ECB liquidity and bond-purchase program, political sobering up and crises awareness in the countries.
2) Muddling through (main scenario - prob: 70%)
Large similarities with our last Nordic Outlook (November 2010) forecast. The crises is not solved in a near future and new elements are added. Portugal will need support and eventually also Spain. This means that more financial muscles are necessary for EFSF/EFSM and from the IMF, which we expect will be provided. The threat of default in especially Greece lives on but ECB/EU/IMF have possibilities to ease the situation and move the defining moment ahead in time which creates uncertanties but buys countries time to implement consolidation packages. A full European sovereign debt and banking crises can be avoided - we muddle through.
3) Heavy turbulence and default in some countries (prob: 15%)
The present turbulence turns to the worse. The need for resources to save countries and banks increases dramatically as Portugal and Spain needs assistance and also other countries like Italy, Belgium and France lose market confidence. Consolidation packages create a negative spiral that can not be broken: government savings push countries towards recession which increases the need for additional savings etc. Several countries face protests and political authority is weakened. Even Germany has to pay a price: large commitments pushes interest rates up and raises doubts over how long Germany will support weak countries.
In the report, there are sections on:
- Macro and fiscal outlook for PIIGS
- Three scenarios for the coming 6-12 months
- Key macro data
- Euro-zone crises: financial safety nets
- Consolidation measures
- Financing need 2011-2013
- Rising cost of servicing sovereign debt is not the main problem
- Political agenda
- Exposure of banking system
- Renegotiation of debt: A comparison with Argentina (2001) and Russia (1998)