RBS predicts ‘violent’ Greek default by December

RBS expects Greece will experience a hard default this December in a move it says will cause “violent contagion” in global markets.

In a note to clients, RBS European rates strategist Harvinder Sian said Greece will default on or around the IMF’s 11 December review of its fiscal reforms.

The note pointed to the inability to implement reform, over-aggressive austerity targets, an absence of further compromise from the IMF and EU and the increasing difficulty of passing laws through the Greek parliament as factors influencing its forecast.

“The only reason for suspecting the 11 December review is still the more pivotal date [than the 11 September review] is the idea Greece has at one more iteration of promises to make and policymakers have every reason to close their eyes and hope, and give the benefit of doubt until the situation is so clearly negative that nothing can be done”, Sian said.

If and when Greece defaults, a violent contagion will require ECB interventions and possibly a global reaction, he added.

“Private capital simply will not come back to these sovereign and related capital markets as the risks of a dissolution to the euro rises,” the note said. 

It added the ultimate solution is “huge ECB intervention in European government bonds and perhaps private bond markets”.

Sian, who also raised the possibility of global assistance via the easing and lending or buying of sovereign and private debt, said markets are only now beginning to price in a “dark scenario”.

“Bunds (and treasuries) can trade to a much lower yield level if the crisis unfolds on a Greek default and we will only change our bullish call when the facts change towards a EMU healing process, even if this means sub-1% yields”, he said.

“In any case, a Greek default is coming and is a pivotal factor is our assessment that all European government bonds ex-Germany at this stage are still speculative investments.”

 

This article first appeared on Investment Week

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