Amundi AM predicts 5% chance of eurozone breakup
A potential breakup of the eurozone is a small but significant possibility with French group Amundi Asset Management predicting there is a 5% chance this “worst-case scenario” could become a reality.
Amundi AM acknowledged this outcome would be unchartered territory for Europe and would necessitate being overweight credit over sovereigns in its monthly investment strategy report.
If the eurozone breaks up, it said three blocks could emerge: AAA countries (if any remain) with no solvency problems; a group that is struggling to avoid default and a block that has defaulted.
The second and third blocks would face a severe recession, which countries in the first block would escape. In such a scenario Amundi Am would be underweight most asset classes (the euro, equities, financial stocks, credit, real assets and European debt), favouring cash in portfolios and being overweight credit vs sovereigns.
However, the group said it had “great hopes” the stalemate which has lasted two years in Europe will ease off, with a 65% likelihood that Europe will move toward an “easing scenario”.
This more optimistic situation can only occur if fiscal discipline is etched into constitutions, the European Central Bank (ECB) continues its sovereign debt purchases and adopts a QE policy to fight deflation and if Germany stimulates growth.
Simultaneously Greece must undergo an orderly default and Europe’s banks be recapitalised in an orderly fashion, Amundi AM argued.
These measures should ensure a light recession in Europe, it said, in which case it will bring risk back into portfolios. The asset manager would be underweight on current AAA issuers in the eurozone and go long on peripheral sovereigns.
Meanwhile it would go short on gold and go long on equities, financial stocks, credit, emerging markets and commodities while reducing cash in the portfolios.