Morgan Stanley on European Credit Contagion

Some highlights from Morgan Stanley. For full details see the document below.
  • Final step towards bilateral loans and IMF stand-by agreement taken
  • The aid package limits the near-term liquidity risk and buys more time
  • But the long-term issue of debt sustainability (i.e., solvency) remains
  • Debt restructuring unlikely in the near term, but possible longer term
  • Financial market reaction to the package will determine whether it works
  • Key factors are additional austerity measures the IMF/EU are asking for
  • Near-term event risk: last political or legal hurdles
  • Contagion: Focus back on other peripheral countries (Portugal, Spain)
  • Portugal may be too small to matter; Spain would raise capacity issues.
  • Periphery needs to act now, in our view, and propose additional austerity measures
Contagion Call Slides

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