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Euro Crisis Essay

2783 words - 12 pages

The Eurozone in 2012

EUROZONE CRISIS: Eurozone fracture in 2012

This paper outlines a plausible scenario in which the Eurozone fractures in 2012. Events are unlikely to follow
the path precisely as described, given the complexity of the problem and the number of variables which are
continually changing. That said, we feel 2012 is unlikely to end with all the current members still being part of
the Eurozone. Mapping a ‘break-up’ scenario should help readers understand how fragmentation could occur
and therefore assist businesses’ contingency planning. To this end the paper highlights some key events and
when they are due to take place. It also identifies some key ...view middle of the document...

With private investor confidence weak, Italy is forced to rely on large EFSF purchases of its sovereign debt
issuance in early 2012, depleting the size of the fund. In the second quarter, Italy suspends its debt
repayments following the collapse of the Monti administration and differences with the IMF and other
Eurozone leaders.
The ECB is likely to increase liquidity provision and work with Eurozone governments to protect their
banking sectors. However, Eurozone leaders remain unable to agree crucial policies in time to stem the
contagion from Greek and Italian sovereign non-payments. Portugal and Spain, unable to access emergency
bailout funding and with no recourse to private investors, suspend their debt repayments and also
announce their intention to leave the Eurozone.
From early 2013 onwards, politics in Europe becomes more polarised and nationalistic. Those nations
withdrawing from the Eurozone impose protectionist measures, in part to limit the loss of their foreign
reserves. Amidst much acrimony, the EU begins the process of scaling back to a free trade agreement.

10 January 2012 | PAGE 1


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EUROZONE CRISIS: Eurozone fracture in 2012

Key indicators in 2012:
Alarming Signs:
1. The failure of the PIIGS to get their debt auctions away in full to private buyers at sustainable interest rates
(e.g. < 5%).
2. Ratings downgrades for the French government and the EFSF, increasing investor scepticism that the latter is
able to support PIIGS struggling to sell bonds to private investors.
3. The IMF losing patience with Greece’s failure to implement structural reforms, refusing to extend further
4. Mario Monti being unseated in Italy and the government’s relationship with European partners and the IMF
turning sour.
5. Weak growth figures in major European economies (e.g. quarterly GDP and employment).
6. A wave of euro-scepticism across the Eurozone with governments under pressure to resist austerity measures
and fiscal union.
Positive Indicators:
1. Eurozone banks making heavy use of the ECB’s unlimited supply of three-year loans and investing this in PIIGS
sovereign debt, driving bond yields lower.
2. The ECB making a commitment to purchase sovereign debt directly and in unlimited quantities.
3. The Eurozone’s AAA rated governments agreeing to issue bonds jointly to support the rollover of PIIGS’
sovereign debt.
4. Governments (especially Spain and Italy) making substantial progress on meeting their fiscal targets and
reform measures.
5. Eurozone governments reaching credible agreements to impose legal limits on sovereign debt and deficits,
empowering AAA rated economies to make the political case for more bailout action.
6. Eurozone leaders delivering the promised funding of €200 billion to the IMF and €500 billion to the European
Stability Mechanism (ESM) during...

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