Hussman: Euro plan won’t work in recession scenario

Genevieve Signoret

John Hussman visualizes what seems to me a plausible scenario for a euro deal and its consequences. Note that, in his scenario, the grand solution emerging this week doesn’t hold up (“all bets for stability are off”) in the event of a subsequent recession. And a subsequent scenario is his central scenario (mine too):

The bottom line is a) European leaders will likely initiate a forced bank recapitalization within days; b) Greece will default, but the new hold-over funding may give the country a few more months; c) the EFSF will not be “leveraged” by the European Central Bank; d) banks are likely to take haircuts of not 21%, but closer to 50% or more on Greek debt; e) much of the EFSF will go toward covering post-default capital shortfalls in the European banking system following writedowns of Greek debt; f) the rest will most probably be used to provide “first loss” coverage of perhaps 10% on other European debt, which may be sufficient to limit contagion provided that implied default probabilities on Italian and Spanish debt don’t breach that level and the global economy stabilizes; g) uncertainty following a Greek default is likely to create significant financial strains, even in the absence of a recession; h) all bets for stability are off if the global economy deteriorates markedly from here, which is unfortunately what we continue to expect.

Hat tip to The Big Picture for leading me to Hussman’s post.