Euro yield curve to drop 40% if PIIGS exit eurozone

If Portugal, Italy, Ireland, Greece and Spain exit the eurozone there would be 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, according to research from Sungard.

The research also predicts this scenario would cause EU banking stocks to fall by 25% and ITRAXX financials credit spreads to increase by 100%

This would imply downgrades and losses of up to 20% in high-grade corporate debt. If this scenario took place, there could also be losses of up to 15% for global equities with near-doubling of volatility and the VIX over 50

The research was carried out using SunGard’s APT risk system which modelled different Euro breakup scenarios. The APT system used a global factor model incorporating macro-economic factors to estimate cross-asset class effects.

APT drew on a range of economic research and examined the mechanisms by which shocks are transmitted between different asset classes, reviewing the two most recent sovereign debt shocks to markets in March 2010 and August 2011.

The system also found if just Greece and Portugal exited the eurozone, there would be 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 (ITRAXX Europe).

A total collapse scenario 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, the research showed.

The results seek to model the impact of each scenario over three months, looking eight weeks before and six weeks after the shock to form a balanced picture.

“It is important to realise that [a eurozone breakup] 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,” noted SunGard APT’s head of research Laurence Wormald.

Close Window
View the Magazine

I also agree to receive editorial emails from InvestmentEurope
I also agree to receive event communications for InvestmentEurope
I also agree to receive other communications emails from InvestmentEurope
I agree to the terms of service *

You need to fill all required fields!