MAJOR global banks are advising clients to prepare for a sharemarket rally and a resurgence of the euro if Greece is forced out of monetary union, betting that world authorities will flood the international system with liquidity.
Bank of America said it expected a "powerful short squeeze" in risk assets as speculative funds unwind positions, led by a rebound in battered bank stocks and Club Med bonds. The euro would surge 10 per cent to $1.40 against the US dollar after dipping first to $1.20 in the immediate panic. The benign outcome assumes that the European Central Bank steps in with massive support, backed by the US Federal Reserve, the Bank of Japan, and key central banks along the lines of concerted action in 2008-09.
Bank of America said EU authorities will pull out the stops to keep Greece in the system as they weigh the full dangers of contagion. Should that fail, it expects a series of dramatic moves.
The ECB would cut interest rates, launch quantitative easing (QE), and back-stop Spain and Italy with mass bond purchases the authorities would inject capital into the banks and create a pan-European system of deposit guarantees. The combined moves would be a major step towards EU fiscal union.
"We think the worst is over for the euro," said David Bloom, currency chief at HSBC. "The central banks will have to step in massively and that will be a soothing balm for the markets. The Fed is already leaving the door open for more QE. We could see quite a powerful rally."
A currency union without the encumbrance of Greece would be viewed as a stronger bloc by investors, but much would depend on events in Greece itself.
Gary Jenkins from the bond advisers Swordfish said it would be fatal if Greece were forced out in acrimony, without any stabilising support. That would lead to a hard default with losses of up to ?200 billion.