With Civil Collapse Likely, Euro Break-Up Chances ‘Close to Zero’: UBS

Amid continuing wrangling over a European rescue of Greece and threats about forcing the debt-strapped nation out of the euro, UBS has issued a research report warning a Eurozone is “virtually impossible” and risks devastating economic and even military consequences.

In its paper released Tuesday, UBS Investment Research says “popular discussion of the break-up option considerably underestimates the consequences of such a move,” giving the chances for dissolution of Europe’s monetary union “close to zero probability.”

The reasons UBS analysts Stephane Deo, Paul Donovan and Larry Hatheway cite are both economic and political. Economically, the costs are simply too great to bear, amounting to 40% to 50% of GDP in the first year for a weak country and 20% to 25% of GDP in the first year for a strong Eurozone country. Costs in subsequent years would be lower, though still formidable.

For a weak country, UBS says “consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance.” The consequences for a stronger country like Germany would include “corporate default, recapitalization of the banking system and collapse of international trade.”

UBS says the cost of a German exit from the euro would be magnitudes greater than the cost of an outright bailout of Greece, Ireland and Portugal, which UBS estimates to be 1,000 euros for every German adult and child, in a single hit. In contrast, the cost per German of a euro exit would “be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter.”