Europe Economy

'Sudden Crisis' Averted, But Coming in January

Researchers at Exclusive Analysis who expected a “sudden crisis” scenario to unfold by November 26 have put back the expected arrival date of such an event, saying a crisis is now not likely to unfold until the end of January as new technocratic governments in the euro zone offer the region temporary relief.

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois.
Daniel Acker | Bloomberg | Getty Images

A “sudden crisis”, according to Exclusive Analysis, would be triggered when a sovereign is unable to meet its financial obligations to creditors without outside help such as rescue by the IMF, financial assistance by another sovereign or renegotiation with creditors.

Since the firm published its November 8 report giving a 65 percent probability to a “sudden crisis” scenario unfolding by 26 November, bond yields have risen in peripheral euro zone countries; core European bond markets have come under attack and growth estimates have been downgraded across the euro zone.

“We retain this weighting but are deferring the timing until late January,” Exclusive Analysis said in a note on Friday.

“This is mainly because new technocratic governments in Greece and more so Italy are likely to enjoy short honeymoon periods, receiving support from European leaders (e.g.

ECB bond purchases tempering the rise in Italian yields),” it said.

It warned however that these honeymoons were unlikely to last into 2012 “as opposition hardens towards unelected officials trying to impose tough austerity measures”.

Other positive events that have “bought some time” for the euro zone, according to the firm, include strong ECB purchases of Spanish and Italian bonds which has tempered the rise in bond yields.

Hopes that the December 9 European Summit will yield the prospect of a lasting solution to the crisis have also brought temporary relief, Exclusive Analysis said.

The research firm pointed out that despite reports of the decline in interbank lending as banks scale back their exposure to the debt of Portugal, Ireland, Italy, Greece and Spain, “the withdrawal is not yet as rapid as to cause a banking crisis in the week beginning 21 November.”