Risk of Euro Break Up Higher Than Ever As Political Storm Hits In September

After weeks of apparent calm in Europe, the sovereign debt crisis that has engulfed the Old Continent is set to explode once again. As policymakers return from summer breaks and the EFSF debate flares back up, Nomura’s analysts strike an eerie tone: “we are just about to enter a critical period for the Eurozone [where] the threat of some sort of break-up between now and year-end is greater than it has been at any time since the start of the crisis.”

Ratification of the EFSF, an inherently political processes that must pass through legislative bodies across Europe, and Greece’s capacity to reach an agreement with private creditors over a “voluntary debt restructuring” will stir the volatility pot in coming weeks and send ripples through European and global markets.

The 18-month long Euro sovereign debt crisis has been characterized by a series of market shocks followed by momentary calm after the European leadership speaks up with some sort of seemingly permanent, but actually temporary, solution, repeating itself ad infinitum. Nomura’s analysts infer that shocks will return in September. (See below for a list of important events in coming months, courtesy of Nomura).

One important variable to watch is the evolution of Greece, and, in particular of its debt restructuring program. Greece has set a deadline of September 9 for 90% of private investors (in Greek sovereign debt) to sign up to the debt swap deal agreed on July 21 (see the IFF’s release on investors’ different options within the program here). Estimates suggest about 70% have taken the bait. Greek authorities have suggested that unless they reach the magical 90% number, they “will not feel obliged to continue with ‘any portion of the [austerity] package.’” (more)