SunGard models euro breakup impact on asset classes

A Piigs exit from the single currency would bring a 40% drop in euro yield curve and 20% fall in euro equities, according to modelling from SunGard's APT risk system.

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SunGard models euro breakup impact on asset classes

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SunGard has put together five euro breakup scenarios - ranging from the departure of Greece to a complete colllapse of the currency - in a bid to predict the likely effects across asset classes.

The departure of Greece and Portugal would lead to a 15% rise in the euro against the dollar, a 20% fall in eurozone yields, a 15% fall in eurozone equities and a 20% increase in credit spreads.

In contrast, if the Piigs (Portugal, Italy, Ireland, Greece and Spain) all left we would see a more pronounced effect, with a 25% rise in the euro against the dollar, a 40% drop in the euro yield curve, a 20% drop in euro equities and a 15% drop in US equities.

In addition EU banking stocks would fall by 25% and Itraxx Financials credit spreads would increase by 100%, which would imply downgrades and losses of up to 20% in high-grade corporate debt, says the model.

The worst case scenario, a total collapse, would see European equities down 40%, US and global equities down 30%, euro yields down 75% and Itraxx Europe and Itraxx Financials credit spreads up 150% and 200% respectively.

Oil would fall across the scenarios, ranging from five per cent from a Greece departure through to a 50% decline from a complete breakup. Sterling would strengthen against the Euro by between five per cent and 25% across the scenarios.

SunGard is not alone in modelling the potential for a eurozone break-up. Firms such as Icap and industry utilities like CLS have initiated scenario planning in the event of a major soveriegn default and subsequent euro exit. Banknote printers also report that central banks have been scouring the market for printing presses capable of running large stocks of once-defunct currencies.

Laurence Wormald, head, research, SunGard APT, says: "It's important to realise that this is not a black swan, it's a widely discussed possible event, and while unprecedented it can't be classed as very improbable, nor would it be rare. Since 1945, 87 countries have left currency unions. We're not analysing the probability of breakup, but the likely consequences it would bring, helping investors make contingency plans."

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Comments: (1)

Cristian Vlad Managing Director at Consult Services Ltd

Laurence,

As a professional, I would also be interested to see the scenario where Germany would leave the euro.  And the resulting scenario should also include the new DM values.

 

Thank you,

Cristian

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