However, a consensus might just be forming as analysts, investors and commentators are now able to make their own minds up about the future direction of the European Union, its currency and its membership.
For example, Neil Dwane, chief investment officer, Europe, at RCM, says that the EU may actually have listened to the words of the IMF meeting in Washington over the weekend allowing certain conclusions to be drawn:
Greece will default
“We continue to believe that Greece can default within the euro. The questions are thus by how much, and who will recapitalise its banks,“ Dwane says.
“Recent IMF estimates suggest that Greek debt-to-GDP is around 180% and not yet under control with the economy currently contracting at around 7%. Markets are pricing in a default of 50% which may not be enough to place Greek finance on a sustainable footing. So perhaps a default of 50-60% of GDP is mooted with a clear plan for austerity going forward and a model for other financial perpetrators.“
Carl Astorri, global head of economics and asset strategy at Coutts, agrees, saying the likelihood of Greece defaulting within the next few months is very high.
He continues: “The wider economic and financial market impact will be determined by whether the default occurs in an orderly or disorderly way. News over the weekend that the European authorities are preparing various mechanisms for an orderly default is encouraging. But implementation of these proposals is still some way off.”
Any restructuring needs to be planned in advance, he argues, and even though a great deal of short-term fuss will be made over the IMF, EU and ECB handing over a further €8bn tranche of funding, he says: “Without a mechanism in place to avoid a disorderly default, the costs of default could be much higher.”
Equities are the answer
Dwane argues that equity markets have already priced in lower economic growth scenarios, its banks are at a post-Lehman Brothers low, equities are under-owned in the EU and offer two- or three-times the yield of most sovereign bond markets.
“The world is suffering from excess and excessive debt, such that default and inflation inevitably beckon. Equities are the answer, not the problem, but remain whipsawed by events which are not of most corporates’ making.”
But still no policy
Despite the growing consensus, there is still a distinct lack of detail, with eurosceptic John Redwood, chairman of Evercore Pan Asset’s investment committee, saying markets still need to see this detail and know that any plans to be put in place are credible.
“We are still some way away from successful resolution of this crisis. It is now damaging assets not directly affected as well as those centre stage for the crisis. We continue to recommend caution, with substantial cash positions ready to take advantage of substantial weakness in risky assets in due course when a way forward can be seen,” he suggests.
