European Stocks On Verge Of 50%-Off Greek Light Special

It seems the clarion call for central bank intervention to save us all is growing louder as following Citigroup's imploring letter earlier in the week, SocGen has done its homework on the impact of a Greek exit from the Euro and finds Euro Stoxx could drop by 50% under a contagion scenario. They believe the reason why the eurozone market is holding up relatively well - despite the rising risk of a Greek exit - is that contagion has not really spread yet, which is then 'discounted' away based on expectations of a central bank put to save the world. In the case of a disorderly break-up (the only kind there can be realistically in our view), they expect eurozone profits to decline for two years, a rise in bond yields (raising cost of funds), a rising equity risk premium, and the implicit drop in P/E multiples. A Greek exit alone (with no contagion) would likely knock 10% off Euro Stoxx but the significant rise in correlations across the euro-zone suggests the idiosyncratic becomes systemic very rapidly.

European market ex-financials has held up relatively well...

but risk of contagion is dramatically high considering the correlation in the euro-zone...


In order to profile the impact of a Greek exit on the DJ Euro Stoxx 50 SocGen imputes:

  • a profits growth decline for two years after restructuring as a result of lower consumption and fiscal tightening in countries remaining in the eurozone,
  • euro depreciation vs the dollar,
  • a rise in bond yields due to risk of default, partly offset by recession fears,
  • a domino effect which is proportional to correlations we showed on the previous page,
  • a rise in the equity risk premium.

Once the potential level of this year?s euro profits is recalculated using our top-down regression model, we input the result into an earnings yield equation to get the DJ Euro Stoxx 50?s sensitivity to both rates and profits. Should profits fall 20%-30% and yields widen 100bp-200bp, we find the DJ Euro Stoxx 50 could lose up to 50% of its value at 23% in the best case and 45% in the worst.

With a 50% drop possible and 10% probable if Greece leaves...


with various scenarios as follows:


Source: SocGen