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BCG Presents The One Chart To Explain The Implications Of Leaving The Euro

Tyler Durden's picture





 

On a day when data confirms Spanish bad loans creeping up to recent highs and deposits continuing to stream out of the periphery, Boston Consulting Group has released an excellent treatise on the "What Next? Where Next?" perspective of the impact of collateral damage in and out of the Eurozone. The critical questions for most market watchers and prognosticators remain, how likely is an exit, and what would be the implications for 'leaver' and 'left behind'? BCG offers an at-a-glance chart of the economic, social, and market expectations for the ins-and-outs and notes, in less-than-Deutsche-Bank-like mutually assured destruction language, the cost of leaving the Euro varying from EUR3,500 to 11,500 depending on weak or strong exiting country per person per year. No matter what, an exit would impact the world economy considerably and BCG strongly suggests corporate management consider a Euro-zone breakup as a possible scenario for next year, along with a muddle-through, Japanese deflation-like evolution, and significant inflation possibilities.

 

What If?...

For some commentators, it is not a question of whether the euro zone will break up but of how and when it will break up. There is undoubtedly an increased risk of at least some (potentially disorderly) fracture in the euro zone. And some governments are rumored to be preparing just in case - by, for example, securing sufficient capacity to print new supplies of money. Not surprisingly, we have engaged with many clients to discuss this scenario and prepare for it. A country leaving the euro zone would need to do the following:

  • Announce and immediately impose capital controls
  • Impose immediate trade controls (because companies would otherwise falsify imports in order to get their money out)
  • Impose immediate border controls (to prevent a flight of cash)
  • Implement a bank holiday (to stop citizens from withdrawing their money and running before the devaluation) and - although this is somewhat hard to imagine - stamp every euro note in the country, converting it back to the national currency.
  • Announce a new exchange rate (presumably not floating at the beginning, given capital and exchange controls) so that trade could  continue.
  • Decide how to deal with existing outstanding euro-denominated debt, which would probably entail a major government and private-sector debt restructuring (that is, default). This might be easier in the case of government debt, which tends to be governed by domestic law, in contrast to the debt of major corporations, which normally governed by UK law (but we would assume enactment of laws declaring a haircut here, as well).
  • Recapitalize the (insolvent) banks to make up for losses from defaults
  • Determine what to do with the non-bank financial sector, the stock and bond markets, and every company account and commercial contract in the country.

 

Any break up would lead to significant turbulence in financial markets - just think about the number of CDS outstanding - and a worldwide recession. The OECD has warned that a breakup of the euro zone would lead to 'massive wealth destruction, bankruptcies, and a collapse in confidence in European integration and cooperation,' leading to 'a deep depression in both the existing and remaining euro area countries as well as in the world economy.' The chart above describes a breakup scenario and its potential implications.

 


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Mon, 12/19/2011 - 05:47 | Link to Comment baten
baten's picture

great news

Mon, 12/19/2011 - 06:03 | Link to Comment slaughterer
slaughterer's picture

There is some fairly large ECB-supported Spanish and Italian gov bond purchases taking place today right now.   IF you are asking why futures are green...

Mon, 12/19/2011 - 07:32 | Link to Comment Ghordius
Ghordius's picture

Lots of folks just keep forgetting that the EUR was designed as a result and as a "solution for eventuality" of this kind of currency wars as we are experiencing now (same as that the EU was designed for an eventual trade war as in the 30's that hopefully we'll not have).

Leaving the EUR at this stage is economic suicide - leaving the EUR at a different point in the future is another matter altogether (this eventual future would have to be very rosy, though - or when you have no other alternatives).

The irony is that leaving the EUR has similar implications/game theory aspects as leaving a gold standard while most other economies have already left it. Again, this part was designed into the scheme...

The future of the EUR depends now on the performance of the GBP - if the Pound is still a good proposition in a few years, then perhaps some will break out. If the medium-nation-state-currency proposition is too much under attack by speculation (and the more liquidity you have in the markets, the more speculation you have), then we could even witness an entry of the UK into the EuroZone... the horror!

Mon, 12/19/2011 - 09:20 | Link to Comment taraxias
taraxias's picture

Stop thinking in terms of "in a few years". There are no more "in a few years" left in this can, it's just that you've been conditioned to think that way.

Mon, 12/19/2011 - 11:52 | Link to Comment old naughty
old naughty's picture

+1.

Mon, 12/19/2011 - 12:49 | Link to Comment Ghordius
Ghordius's picture

"...you've been conditioned to think that way" ??? LOL

You think I am one of the Goldilocks Propaganda troop?

I'm expecting some "resolution" (I still think serial defaults will be as likely as anything else) since the early eighties.

At that time some of my bonds had a yield over 16%, btw.

Mon, 12/19/2011 - 06:02 | Link to Comment traderjoe
traderjoe's picture

Why would a euro exit cost anything at all? Perhaps it will save even more. Sovereign countries don't have to borrow at all. They can simply print (see the United States Note).

Default on the debt. Print debt-free money. Allow trading in gold and silver. Done. Saved you bunches of 'money'.

Mon, 12/19/2011 - 07:39 | Link to Comment Ghordius
Ghordius's picture

because it depends on the scenario:

if only one country leaves, then the debt stays in EUR - you suddently have a foreign FX debt that can't be inflated away, only defaulted. Then you start wondering why you left the EZ at all...

if all or most countries leave, then you might be able (perhaps) to redenominate the debt into the old/new currencies. Probably only part of it, though...

Mon, 12/19/2011 - 09:22 | Link to Comment taraxias
taraxias's picture

DEFAULT and tell them to fuck off. The debt doesn't stay in EUR, it vanishes in a millisecond. It's been done before, this time is no different.

Mon, 12/19/2011 - 12:50 | Link to Comment Ghordius
Ghordius's picture

well, I'm talking about currency - funnily very often defaults strenghten a currency, btw.

Mon, 12/19/2011 - 14:39 | Link to Comment steve from virginia
steve from virginia's picture

 

The euro was accompanied by high hopes, it was by design a hard currency, coupled with Europe's 'principled' anti-semitism the Europeans believed they could get a better deal on crude from the sheiks than could the Americans.

From the beginning the euro was an energy hedge, now it's blown up by very high prices. A currency constraint necessary to give the euro 'value' leaves too little in circulation, the result of the latter is deflation and the result of lifiting currency constraints is fuel that even more expsnsive than it is now.

Which leaves the Eurozine as a ponzi scheme where new funds from the outside are necesaary for the EU to gain liqidity while keeping the euro 'hard'. This dilemma is what Merkel, Draghi, Sarkozy and Camreron are agonizing about. They need to have the Ponzi because there is nothing else ...

Cameroun has exited the Ponzi and the issue turns into game theory. Someone will be next and someone last. If Germany is last all is lost, she will hold the bag of European liabilities. Exiting first would ruin Germany as it would be a default. The UK govt does not hold enough euro liabilites or assets to make a difference. A euro balance sheet is all Germany has!

The only hope is for all to exit together which is unlikely. Game theory, someone will lose this game.

Mon, 12/19/2011 - 08:48 | Link to Comment Youri Carma
Youri Carma's picture

I totally agree it's all fearmongering so that we keep signing on to these banksters debts which is at the base of their power.

In fact a default will and would have saved us a lot of money in rent on loans just to pay of debts incuced by fraud which are getting more and more expensive with the rising risk accompanied by the rating agencies onslaught in Europe.

Mon, 12/19/2011 - 10:04 | Link to Comment spanish inquisition
spanish inquisition's picture

Most of the wars of the last 100 years were private bank consolidations. Interesting that most of the countries that are against the American way of life print their own money.

Mon, 12/19/2011 - 18:07 | Link to Comment smiler03
smiler03's picture

You mean there are countries in the world that don't print dollars?? Shock Horror.

Mon, 12/19/2011 - 06:08 | Link to Comment aquagreen73s
aquagreen73s's picture

cds outstanding...yeah right. Europe can implode the the ptb won't allow default swaps to be triggered. Heck, Europe, Japan and the US could implode and the PTB won't allow a triggering of default swaps. That's not how the game works. Transparency is not allowed unless it benefits the PTB. We'll just coast along until one day we wake up and all fiat currencies are hyperinflating. The 3 day grocery supply will be gone in an instant and then we will be nearing the inevitable conclusion of totalitarianism.

Mon, 12/19/2011 - 08:17 | Link to Comment wandstrasse
wandstrasse's picture

The future belongs to (more) central planning / command economies. If we like it or not.

Mon, 12/19/2011 - 09:54 | Link to Comment wandstrasse
wandstrasse's picture

.

Mon, 12/19/2011 - 06:24 | Link to Comment Element
Element's picture

And the NET effect is ... looks kinda EX soviet union-esque ...

go long lentils and wheat

Mon, 12/19/2011 - 06:23 | Link to Comment nostromo17
nostromo17's picture

 I like to call it "realized wealth destruction."

Mon, 12/19/2011 - 06:23 | Link to Comment nostromo17
nostromo17's picture

 I like to call it "realized wealth destruction."

Mon, 12/19/2011 - 06:29 | Link to Comment Sudden Debt
Sudden Debt's picture

A lot of flight into quality when the shit hits the fan.

I wonder what kind of golden quality with silver linings they mean....

 

Mon, 12/19/2011 - 06:33 | Link to Comment Baptiste Say
Baptiste Say's picture

BCG seem to have plagiarised straight from 'The Ten Planks Of Communism'. They might as well add an extra couple steps for the sake of it:
1. Put a photo of the dear president in every room.
2. Build an impenetrable border fence and some gulags out west.

Fucking bunch of tyrants, the government in exiting countries has already caused enough problems why give them more licence to strangle freedoms and trade?

Recapitalise the failed banks and increase the moral hazard. Determine what do with EVERY company account and commercial contract. BCG congrats on producing a roadmap to serfdom for the political class to use.

Mon, 12/19/2011 - 06:44 | Link to Comment george1982
george1982's picture

OMG! words cant describe how much i hate bloomberg tv and cnbc. i havent watched it for years, but i thought fuck it! for a laugh ill see what they got to say, what alot of fuckin crap!!!!

 

Mon, 12/19/2011 - 07:18 | Link to Comment george1982
george1982's picture

who the fuck can say with certainty that  the sp500 is gonna be at a SPECIFIC level at the end of 2012? thats not analysis thats a fucking big guess!

Mon, 12/19/2011 - 07:30 | Link to Comment fonzanoon
fonzanoon's picture

Unless they knew beforehand what it was going to be.

Mon, 12/19/2011 - 07:36 | Link to Comment george1982
george1982's picture

ah yes maybe the likes of bernanke know, but dickheads on cnbc dont!

Mon, 12/19/2011 - 06:47 | Link to Comment Peter K
Peter K's picture

"you can pay me now, or you can pay me later!"  :) 

Mon, 12/19/2011 - 10:15 | Link to Comment GMadScientist
GMadScientist's picture

"later!" - Iceland

Mon, 12/19/2011 - 06:49 | Link to Comment Peter K
Peter K's picture

BTW, How is that Greek 2.5b Euros debt redemption to the Private Investors going today?

Anyone knows is payment has been executed?

Mon, 12/19/2011 - 06:49 | Link to Comment sabra1
sabra1's picture

just a reminder peoples! the soon to be in hell globalists, are buying up all debts hand over fist! when ready, they will demand payment! they'll make you rent your dwellings, take away medicare, your jobs. once the infrastructure is in place to handle mass riots, they'll take away your food stamps and welfare checks! just look at all the debt placed upon more debt, upon more debt! nothin' being paid off! we will be dependant on them if you want food, health, a roof! GET OFF YOUR BUTTS, AND DO SOMETHING TO TAKE IT ALL BACK! NOW!!!!!

Mon, 12/19/2011 - 07:41 | Link to Comment Dugald
Dugald's picture

Apart from bumming your chat, what positive action have you taken to date???

Mon, 12/19/2011 - 09:54 | Link to Comment sabra1
sabra1's picture

i, uhh, JUST JUNKED YOU!!!!!!!!

Mon, 12/19/2011 - 10:16 | Link to Comment GMadScientist
GMadScientist's picture

You're like John the Baptist...without the cool shroom-trippin' imagery.

You first.

Mon, 12/19/2011 - 07:29 | Link to Comment evolutionx
evolutionx's picture
No Eurobonds – no euro

According to the EU monetary chief, the eurozone may only have a few days left to find a way out of the crisis. But economic analyst Michael Mross believes that Germany would rather let the euro die than support the idea of Eurobonds.

http://www.mmnews.de/index.php/english-news/8997-no-eurobonds-no-euro-

 

Mon, 12/19/2011 - 09:53 | Link to Comment Dcheeth2
Dcheeth2's picture

I remember reading somewhere a few months back, that if there was going to be a break up, Germany would do it first, and they would do it on 23rd December. Reason being that no markets open again unitl January, letting the dust settle somewhat.

Anyone think this is a viable option?

Mon, 12/19/2011 - 07:33 | Link to Comment The Reich
The Reich's picture

So where is the Manual for the Exit?

Mon, 12/19/2011 - 07:52 | Link to Comment Savvy
Savvy's picture

Interesting vid on the EU collapse. Europeans here might want to give it look. Just maybe, eh?

http://www.youtube.com/watch?v=EPcWHBPYOSU

 

Mon, 12/19/2011 - 09:48 | Link to Comment JPM Hater001
JPM Hater001's picture

Shut the fuck up.

WOW.  Um,  stronger language might be appropriate...

Holy fucking wow.

Total bank takeover.  Only way out of it would be war.

Mon, 12/19/2011 - 09:56 | Link to Comment carambar
carambar's picture

People you should go out and take some fresh air. So many of you didnt even know where Belgium was 6 month ago, and now you make informed comments on the euro-zone. Come on.

Mon, 12/19/2011 - 10:35 | Link to Comment PulauHantu29
PulauHantu29's picture

'Inflation" in every instance for the exiting countries.

Mon, 12/19/2011 - 12:01 | Link to Comment ElvisDog
ElvisDog's picture

CDS outstanding? A non-issue. We've already seen that CDS are never triggered because the defaults are always "voluntary".

Mon, 12/19/2011 - 15:35 | Link to Comment AldoHux_IV
AldoHux_IV's picture

If one were to think recapping the banks after insolvency without restructuring incentives/business model would simply make the same mistakes that will lead to another financial crisis.

The world recession or calamity is not borne from a breakup the euro, but because of many years of maligned growth/debt based policies.

Tue, 12/20/2011 - 00:46 | Link to Comment ThrivingAdmistC...
ThrivingAdmistCollapse's picture

So the impact of leaving the Euro is the destruction of the world economy and the economic downgrading of the exiting nation into 3rd world status?  Who would've known....

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