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October 20, 2011

Consensus is Greek Default by April of 2012

1. Bank of America - More than nine out of 10 (92 percent) of the 199 respondents to October's global survey believe that Greece cannot avoid default. Seven out of 10 respondents predict a default by April 2012. Despite this overwhelming consensus, investors are less worried about sovereign risk than a month ago and less pessimistic about global growth.

EU sovereign debt funding remains the biggest tail risk in investors' minds, but concern has fallen from September's highs. While 68 percent of respondents considered it their number one concern last month, only 61 percent take that view in October.

The survey also suggests that the outlook for growth has stabilized and fears of global recession have receded. The proportion of the panel expecting a global recession in the coming 12 months has fallen to a net 25 percent from a net 40 percent in September.

A net 37 percent of respondents to the European regional survey expect a recession in the coming 12 months, up from a net 11 percent a month ago.

An overall total 286 panelists with US$739 billion of assets under management participated in the survey from 7 to 13 October. A total of 199 managers, managing US$570 billion, participated in the global survey. A total of 141 managers, managing US$331 billion, participated in the regional surveys.




2. Desmond Lachman writes on Greek Default at CNN. Desmond is a resident fellow at the American Enterprise Institute and he was formally a senior official at the International Monetary Fund.

After two years of denial about the European periphery's solvency problem, European policymakers are finally, grudgingly, facing reality. They are recognizing that Greece is almost certain to default by year-end. And they have concluded that it is imperative to recapitalize Europe's banks and to erect an effective "firewall" around Spain and Italy to reassure markets that if Greece defaults, the crisis will be contained there.

Will European policy response be "too little too late" to an ever deepening crisis ?

How deep is the crisis ?

Greece's International Monetary Fund adjustment program is in tatters. The IMF itself is now acknowledging that Greece's economy, which has already contracted by around 12% since 2009, will contract meaningfully further in 2012. And the IMF is also recognizing that Greece will not meet the IMF's budget targets for 2011 and 2012. As a result, Greece's public-debt-to-GDP level will soon rise to 172%, or more than twice the level that might be considered manageable.

Mindful of the 2008-2009 Lehman experience, European policymakers are fully aware that a Greek default could cause real contagion to the rest of the European periphery. They are particularly fearful that a Greek default could engulf Spain and Italy, Europe's third and fourth largest economies respectively, which would pose an existential threat to the Euro.

European policymakers seem to be in no rush to put a credible firewall in place. In particular, they have yet to come up with a concrete proposal to leverage up the European Financial Stability Facility -- the euro zone's temporary bailout fund -- from its present size of EUR 440 billion ($600 billion) to the EUR 2 trillion range ($2.8 trillion), that most market analysts think would be needed to shield Spain and Italy from the fallout of a hard Greek default.

Guardian UK - A Euro crisis could prompt a 35% fall in world markets says Deutsche Bank.

On a milder scenario, under which the crisis is contained and does not spill over to the real economy, we would still expect the MSCI World to fall by around 12%.

The MSCI world index is at about 1600 and is off about 10% from July, 2011 when the Deutsche Bank made the statement about the impact.

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