‘Last Days’ of the Euro Are Upon Us

BOSTON (TheStreet) — The euro is about to go the way of the dodo, if Credit Suisse researchers are correct.

In a research note making the rounds Monday carrying the title The «Last Days» of the Euro, a team of Credit Suisse analysts argue that «we seem to have entered the last days of the euro as we currently know it.»

While a break-up of the 17 eurozone nations isn’t a strong likelihood, Credit Suisse researchers say that some «extraordinary things» will need to happen by mid-January to «to prevent the progressive closure of all the eurozone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.»

Investors are hearing scenarios like this floated almost every day as the European debt crisis has shown no sign of debating, and even the Credit Suisse analysts concede that their report «may sound overdramatic.» However, there is some truth to the logic that investors will realize they cannot properly value what they are holding or buying in eurozone sovereign bond markets.

As Credit Suisse sees it, this problem can’t be fixed by the European Central Bank or even by the new governments created in Greece, Italy and Spain. Instead, investors are looking for credible signals of fiscal and political union, the researchers write. That means that France and Germany will likely be forced into a big deal sooner than either country would like.

Even as new governments start to work on delivering new reforms to deal with the debt crisis, Credit Suisse analysts worry that Italian and Spanish bond yields could march higher. Investors have already seen yields creep up toward 7% on 10-year bonds, which is considered the threshold that would prompt more bailouts.

Unbelievably, Credit Suisse analysts say 10-year yields spiking above 9% for a short period «is not something one could rule out. For that matter, it’s quite possible that we will see French yields above 5%, and even [German] Bund yields rise during this critical fiscal union debate.»

This scenario could happen even as the ECB gets aggressive in lowering rates and providing banks with longer-term funds, Credit Suisse says. This could lead to global equity markets experiencing «a more muted version of their early Q1 2009 selloff until the political brinkmanship is resolved.»

The debate will heat up this weekend with the publication of three different options for eurobonds, the researchers say. This will be followed by a summit on Dec. 9 and a speech by French President Nicolas Sarkozy on Dec. 11.

«While these discussions may give some short-term relief to markets, it seems likely that the process of reaching an agreement will involve some high-stakes brinkmanship and market turmoil in subsequent weeks,» the Credit Suisse analysts write, noting that this is not unlike the U.S. debt-ceiling debate over the summer.

«In short, the fate of the euro is about to be decided,» the research report reads. «And the pressure for the necessary political breakthroughs will likely come from investors seeking to protect themselves from the utterly catastrophic consequences of a break-up — a scenario that their own fears should ultimately help to prevent!»

— Written by Robert Holmes in Boston.




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