Capital Economics has been envisaging a Eurozone breakup since at least 2010, but they’ve just got a little more concrete about this being their central scenario:
Risky asset markets have generally made a bright start to 2012. But our central scenario envisages a break-up of EMU this year initially involving Greece’s departure, an outcome that would presumably dampen investors’ optimism.
That’s from Tuesday’s report, and they go on:
Our working assumption is that Greece will exit the single currency this year, followed by other small economies in 2013. But a much bigger or even complete break-up is possible given the precarious state of Spanish and Italian public finances and the absence of an agreed strategy even to finance a temporary bail-out.
Which will have the following impact on bonds:
However, we also need to factor in the likely impact of a break-up of EMU on bonds. We expect this to prompt further substantial inflows into US Treasuries, but outflows from German Bunds. We think UK Gilts will be caught up somewhere in the middle. The implication is that we forecast 10-year government bond yields to fall this year to 1.5% in the US, to rise to 3% in Germany and to remain around 2% in the UK.
So that would be vast inflows into USTs, naturally.
Related links:
Lawyers plan for possible eurozone break-up – FT
And here’s that UniCredit euro breakup clause - FT Alphaville
EMU — How Will the Markets Price Break-up Risk? – Investment Policy (1999)
Euro exit as legal quagmire – FT Alphaville