Collapse of the currency now an official possibility

A messy, disorderly and globally extremely serious economically disruptive disintegration of the eur zone and the collapse of its currency, a scenario some commentators call eurogeddon, is no longer just the talk of alarmists. At least two European governments have started working on contingency plans for such an eventuality, which would leave very few if any economies in the world untouched by the fallout. 

Britain’s Daily Telegraph reported late last week that British diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis. This comes in the wake of news earlier in the month that the UK Treasury confirmed that contingency planning for a euro currency collapse is under way.

“A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

“It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister reportedly told the Daily Telegraph.

Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.

British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain.

There have already been other reports that even at Germany’s Bundesbank in Frankfurt, technocrats are desperately trying to figure out precisely how bad the consequences of a currency collapse and breakup of the eurozone might be, and are working on contingency plans.

As one report over the weekend put it: “What they are preparing for is the biggest mass default in history. There's no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It's going to be anarchy.”

A large part of the problem can be traced back to a design fault at the time of the creation of the eurozone. The EU treaties that created the euro and its membership made no provision for members to leave, meaning any break-up would be disorderly and probably chaotic.

The entire financial system at risk

If eurozone governments defaulted on their debts, the European banks that hold many of their bonds would risk collapse. And, that risk came much closer to reality last week when even German sovereign bonds put out on tender to the market saw a massive third of it going without buyers.

Some analysts say the shock waves of eurozone governments defaulting on their debts would risk the collapse of the entire financial system, leaving banks unable to return money to retail depositors and destroying companies dependent on bank credit.

It would seem from last week’s  events on European bond markets, that markets are  starting to bet on what was previously a minority view - a complete collapse, or break-up, of the euro.

As one report put it: “Suddenly, no-one wants to hold euro denominated assets of any variety, and that includes what had previously been thought the eurozone safe haven of German bunds.

“Investors have gone on strike. The Americans are getting their money out as fast as they decently can. British banks have stopped lending to all but their safest eurozone counterparts, and even those have been denied access to dollar funding.”

According to a report by CNBC.com Steven C. Wieting, Citigroup's managing director of economic and market analysis, said in a research note: "The impact of Europe is no longer a question of isolating weakness to peripheral countries, but one of how Europe's instability/austerity is isolated from the larger world."

And, it’s not going to be over soon. That same CNBC-report said that Ben May, European economist at Capital Economics in London, expects the debt mess in Italy, for instance, to last "as long as two decades" until the government there gets its debt to GDP ratio below the 100 percent benchmark.

The human face of the crisis

At an individual level there is some hint of the human face that a global financial crisis could take in the task that British diplomats were given last week: “Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash,” The Telegraph reported.

On a broader front analysts at investment bank UBS earlier this year already warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder.

“When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” it said in a note to clients.