Eurozone Tipping Point

Here is Deutsche Bank's summary conclusion on why the Tipping Point is here:

• Markets have lost confidence in the EU's institutional structures and framework
• Italy represents a critical new and dangerous phase of the crisis (the "Tipping Point")
• Italy and Spain have € 300 bn and € 120 bn of 2012 issuance (€ 930 billion combined over next 3 years)
  • Italian sovereign bond market is broken
• The "stakes" have never been higher (including the fate of the Euro itself)
• Politics has become “the” obstacle: All 5 "peripheral" countries have had leadership change in 2011
• The economy (recession) has become “the” unknown variable
• Continued Euro bank sector de-leveraging likely under almost any scenario (over $2 trillion estimate for next 18 months)
• Longer term, external (current account) deficits matter more than fiscal deficits

And here is what DB thinks has to be done right now.

• More progress on credible fiscal austerity (especially Italy)
• Rapid resolution of the EMU's original sin - lack of fiscal integration (Dec 9 EU Summit meeting)
• Restore confidence to re-open bank funding markets
• Time to expedite the "Grand Plan"
  • Larger Greece debt restructuring
  • Bank capital raises and debt guarantees
  • Additional bail-out funds for Greece
• Time to call the ECB
  • Investor reluctance on EFSF € 1 trillion leverage plan
  • Ineffectiveness of ECB monetary policy transmission mechanism to keep bond yields low
  • Adjustment away from current bond purchase program needed (away from temporary, limited and sterilized)
  • ECB should announce large, targeted buying plan (i.e. € 200 bn over 12 months)

But the risks remain considerable:

And returning to a much discussed topic - why has the EUR held up so strong?


But there is plenty of downside risk to come potentially:


 DB Tipping Point Nov 2011 FINAL