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November 17, 2011

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

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