(Written by Alexander Crawford. Institutional data sourced from Fidelity.)
Think Tank Exclusive Analysis just released a grim set of predictions in which they believe there is a 65% chance of a banking crisis between November 23-26 that involves a Greek default and Euro exit, as well as a run on the Italian banking system. At this point, they only attribute 25% likelihood to Europe “muddling though” and 10% to actually resolving the crisis.
The predictions come from a scenario modeling exercise in which they tested various assumptions on the future of the European debt crisis.
The Worst, and Most Likely, Case
Under their most likely outcome (via CNBC), the governments of Greece and Portugal will both soon collapse because of inability to handle the debt crisis. Germany will become opposed to handing out more funds to the EFSF and parliament will actually reduce the money available to the fund.
As a result, China and the other BRICs will signal that they won’t support the bailout fund. The US and the UK will refuse to provide funding via the IMF. The EFSF will then turn to the ECB to print the necessary bailout money, which they’ll refuse to do. This failure will cause European banks to refuse the 50% haircut on Greek debt. The IMF and ECB will suspend payments to Greece.
Between November 18-22, French sovereign debt will be downgraded to AA, causing the interbank lending market to freeze. Depositors in Spain and Italy will create bank runs in fear of banking crises in their own countries, causing “a collapse of the interbank credit market as banks know that most of their counterparts are at risk.” At which point Greece defaults.
Between November 23-26, Greece will leave the euro “to print money and rescue its banking sector. The new currency falls quickly and depositors lose out as their investments are converted into the new local currency.” (via CNBC)
“The government default on the sovereign debt and the banks default on their foreign debt, which causes a banking crisis across Europe. Italian bond yields rise and exceed 7 percent and the country faces bank runs, in face of which the government freezes deposits and defaults on the sovereign debt”.
25% Chance of Muddling Through
Exclusive Analysis also gives a 25% probability to the scenario that Italy and Spain are given breathing room – a so-called “honeymoon period” – to find new solutions until the end of the year. But this scenario still includes failure of Portugal to meet its fiscal targets and a downgrade of French debt.
Greece still defaults by the end of the year, but the fallout is contained in the beginning of 2011 by an agreed-upon 70% haircut. The UK and US will decrease their objections of using IMF funds to support the EFSF, which will halt the rise in Spanish and Italian yields. But towards the end of 2012, civil unrest in Italy and Portugal will resume, as will speculation surrounding the future of the euro zone.
Although the firm puts a 90% probability on Greece defaulting by the end of the year, under the good scenario “stronger political leadership in other PIIGS contains the fallout”.
Exclusive Analysis does not paint a pretty picture for the future, especially considering their 90% probability of a Greek default by the end of the year, but that doesn’t mean you can’t invest with the idea.
For a closer look at the banking sector on US exchanges, we ran a screen for large-cap financial stocks seeing the most net buying from institutional investors over the current quarter.
The smart money is standing behind these names – do you think they’ll be clear of any implications from the European debt crisis?
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List sorted by net institutional purchases as a percent of share float.
1. Prologis, Inc. (PLD): An independent equity real estate investment trust. Market cap of $12.69B. Net institutional shares purchased over the current quarter at 43.4M, which is 9.50% of the company's 456.67M share float.
2. The Blackstone Group (BX): Provides alternative asset management and financial advisory services worldwide. Market cap of $15.04B. Net institutional shares purchased over the current quarter at 19.0M, which is 7.66% of the company's 248.17M share float.
3. Avalonbay Communities Inc. (AVB): Engages in the development, redevelopment, acquisition, ownership, and operation of multifamily communities in the United States. Market cap of $11.84B. Net institutional shares purchased over the current quarter at 5.9M, which is 6.27% of the company's 94.08M share float.
4. Boston Properties Inc. (BXP): A real estate investment trust (REIT), together with its subsidiaries, engages in the ownership and development of office properties. Market cap of $14.14B. Net institutional shares purchased over the current quarter at 5.4M, which is 3.72% of the company's 145.34M share float.
5. Fifth Third Bancorp (FITB): Operates as a diversified financial services holding company in the United States. Market cap of $10.79B. Net institutional shares purchased over the current quarter at 29.9M, which is 3.26% of the company's 916.72M share float.
6. Ventas, Inc. (VTR): Engages in investment, management, financing, and leasing of properties in the healthcare industry. Market cap of $15.07B. Net institutional shares purchased over the current quarter at 8.8M, which is 3.08% of the company's 285.93M share float.