Thoughts on Europe post Greek election

Here are a couple of thoughts from Credit Suisse that I think are particularly interesting and noteworthy;

‘There is apparent momentum towards a European Redemption Fund. Under this
proposal, Euro-area states would progressively roll their government debt in excess of 60% of GDP into a fund jointly backed by all member states. The debt would then be paid off over the next 25 years, using an earmarked part of tax revenues. We are reasonably upbeat about this idea: the size is manageable (c€2.5trn), the collateral realistic (20% of the enrolled debt would likely be collateralised by FX reserves) and the maths does seem to work (for example, the primary budget surplus Italy needs to run would be c4%-5% of GDP). Above all it seems politically possible (as a partial Eurobond), as it is small, partially collateralised and consistent with German Basic Law (as the amounts are capped). Moreover, it is initially a German idea and has been
strongly endorsed by the German opposition parties. Most importantly, it could be implemented relatively quickly (i.e., within the next year)

If Greece were to leave the euro, we believe that within a few weeks, the policy response from core Europe and the ECB would lead to a big rally in markets – but from levels that are around 10% below current levels. A Greek exit would make it politically much easier to move towards some form of Eurobond and banking union: not only would it provide a strong incentive for the other peripheral European countries to comply with core Europe’s demands, but it would also create the sense of an imminent acute crisis, with large scale
deposit flight, which could force the ECB to act aggressively and perhaps encourage more reluctant politicians into accepting the need for a Eurobond (most probably via a European Redemption Fund).’

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