CNBC – There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks. This analysis is also being presented on BBC World News.
Having tested a number of assumptions in a scenario modeling exercise, the Exclusive Analysis team warned it is becoming less and less likely that EU leaders will simply “muddle through” and have made some bold calls with clear timelines on when the euro zone will be thrown into a major financial crisis.
The most likely outcome according to their analysis is a sudden crisis in which the US, UK and BRICs nations refuse to provide funding via the IMF for the euro zone.
Exclusive Analysis is a specialist intelligence company that forecasts commercially relevant political and violent risks worldwide. We leverage our source network and methodology to deliver accurate, decision-ready forecasts to a broad range of sectors. These include insurance and reinsurance, financial services, shipping, banking, oil and gas, aviation, mining, cargo and logistics, governments, NGOs and media.
In the worst case scenario, Exclusive Analysis expects the governments of Greece and Portugal to collapse due to a lack of consensus on how to handle the debt crisis leading to social unrest.
Between November 18-22, French debt, under Exclusive Analysis’ most likely scenario, is downgraded leading to the interbank lending market freezing up with new governments in Greece and Italy “faced down by protestors in their attempts to implement more austerity”.
Civil unrest follows in Spain following the election of a new government which pushes through even tighter austerity measures, and Portugal announces it cannot meet financial targets putting its bailout cash from the IMF and ECB at risk.
This doomsday scenario comes to a head between November 23-26 when Greece leaves the euro to print money and rescue its banking sector. The new currency falls quickly and depositors lose out as their investments are converted into the new local currency.
The unpleasant but less disasterous muddle through scenario
The Exclusive Analysis report predicts a 25 percent chance that the EU will continue to muddle through. In this scenario new politicians in Greece, Italy and Spain are given some breathing room by voters to find new solutions to the crisis until the end of the year. Portugal still fails to meet its fiscal targets, putting its bailout cash at risk, and French debt is still downgraded on prospect of Greek debt default.
“However, the new governments in Italy, Spain and Greece are given a honeymoon period by protestors and euro zone counterparts, which prevents a market rout.”
In January and February, Greece defaults but the fallout is contained as a new deal on 70 percent haircuts is agreed. Spanish and Italian bond yields hit 7 percent.
With Spain and Italy entering IMF programs, the debt crisis rubbles on in 2012 and 2013 before things turn nasty as Greece defaults and recreates the drachma.
“Markets close to Italy and Portugal again towards end-2012 and civil unrest resume, starting off a second cycle of crisis and speculation about the future of the euro zone.”