Europe Stability: Soc Gen sees a lot of 'black swans'

By Paul Colgan

AUSTRALIA: Societe Generale’s latest update to its ‘black swans’ chart has been released. Black-swan events are those which are unlikely to occur but, should they come about, would cause chaos in the global markets.

Europe’s stability has reemerged as the major cause of concern amid the approach of Britain’s referendum whether to leave the European Union. Soc Gen has placed a 40% probability — a very high number for the black swans schematic — on political or policy uncertainty in Europe unleashing financial-market ructions.

Soc Gen explains:

Austria came all too close for comfort to electing a far-right president. The sigh of relief was palpable, but with a very busy political agenda lined up for the coming quarters, the risk of an event delivering an unexpected outcome remains high, be it the OMT judgement f r o m t h e G e r ma n Constitutional Court on June 21, the UK Brexit referendum on June 23, Spanish election on June 26, Italian referendum in October and heading into 2017, elections in France, Germany, the Netherlands and possibly Italy. Whether ultimately good or bad news, any unexpected outcome is likely to deliver an uncertainty shock. The result would be a risk-off mood on markets and a short-term headwind to output until greater clarity returns. Such is the nature of policy uncertainty. Our baseline assumes a drag of 0.5pp on output (accumulated since 2014) to remain over the coming years. That could more than double in the event of an unexpected outcome.

China also features, with Soc Gen seeing a 30% probability of a hard landing. “The potential for policy errors in China is substantial, since a new bubble appears to be building in the property market,” says Soc Gen. “The authorities are clearly keen on starting recognising and tackling the mountain of nonperforming loans. The approach will be one of trial and error, with the downside risks implied in the name.”