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