Thursday, December 8, 2011
UBS advice for a euro collapse: ‘tinned goods, small calibre weapons’
As if there isn’t already enough eurozone doom and gloom floating around these days.
A note from UBS economist Larry Hatheway on Wednesday spells out why he and his colleagues at the bank believe a eurozone collapse would result in an “end of the world” scenario. It makes for some grim reading.
Back in September, Mr. Hatheway and colleagues Paul Donovan and Stephane Deo released a report that predicted a disastrous outcome if even one nation left the eurozone. The economists envisioned a 20% loss in gross domestic product for creditor countries (e.g. Germany) in a break up, and a 40% loss for debtor countries (e.g. Greece).
But Mr. Hatheway now says it could be much worse.
“On reflection this author, at least, feels the estimates are probably conservative — the true costs could well be higher,” he said. “That’s because once Europe (and the world economy) finds itself in depression, policy probably couldn’t arrest the decline. Broken financial systems and ruined economies are the stuff of prolonged deflation or worse.”
Mr. Hatheway goes on to say that the eurozone was “flawed from the start.” But in his view, the pain that would result from a collapse in the monetary union far outweighs the current volatility that stems from trying to save it.
“The preferred outcome is to fix what is broken,” he said.
And for those wondering why the eurozone doesn’t just kick out Greece and be done with it, Mr. Hatheway argues against that type of solution.
“Once one country leaves the eurozone, residents in other at-risk member countries would plausibly conclude their country might be next to go,” he explains. “Logic dictates they would send their wealth abroad, resulting in a run on their domestic banks, precipitating a collapse of their financial sectors and economies”
Mr. Hatheway gives some insight into how bad he thinks the global macro situation could become if the world is faced with a eurozone collapse. He says when people ask him how they should prepare for a eurozone collapse, he gives the following reply:
“I suppose there might be some assets worthy of consideration—precious metals, for example,” Mr. Hatheway said. “But other metals would make wise investments, too. Among them tinned goods and small calibre weapons.”