What could ignite the next crisis in Europe: Credit Suisse

Credit Suisse, in its "Global Equity Strategy" note sent to clients, has identified four key events that could spark another crisis in Europe. First, the Italian constitutional referendum in the autumn; second, the French Presidential election in April/May 2017; third, the EU's refugee deal with Turkey; and fourth, the Italian banking crisis. It noted that "most US clients believe there will be another flare-up of the European political/economic crisis."

Anti-EU protestors in Greece last year. AP Photo/Giannis Papanikos

Credit Suisse has identified four crunch points that could bring about another crisis in Europe.

The 28-nation bloc seems to have been in almost constant crisis since 2008, when the world's financial system blew up: the sovereign debt crisis, Greece, the refugee crisis, and now Brexit.

In a "Global Equity Strategy" note sent to clients this week, the investment bank says: "Most US clients believe there will be another flare-up of the European political/economic crisis."

They highlight four key events that could trigger another crisis for the 28 (soon to be 27) nation group. They are:

The Italian constitutional referendum — Autumn: Prime Minister Matteo Renzi is trying to drive forward constitutional change that will reform the Italian Senate, shrinking it and stripping its legislative power. This is meant to make governments in Italy more stable. However, Credit Suisse says that if Renzi loses the Autumn referendum he will resign and "investors fear that Renzi would be replaced by a coalition led by the 5 Star movement," an anti-establishment, anti-EU party that could push for a EU referendum similar to Britain's. But Credit Suisse says: "If Renzi resigns the most likely outcome is a technocratic administration until the next general election in May 2018." The French Presidential Election — April/May 2017: Credit Suisse writes: "Marine Le Pen, the candidate of [far right] Front National (which wants to hold a referendum on France's EU membership), is the current front runner in the first round of the election (c.29% of votes on the most recent polls). While this is a general concern, we would note that on recent polls she would lose the second round against both Nicolas Sarkozy and François Hollande. We believe that national elections are fought as much on domestic as EU issues." The European Union's refugee deal with Turkey — ongoing: Credit Suisse says: "This deal could break down if certain changes to the Turkish judicial process are enacted or the EU backtracks too far on its commitment to give Turkish citizens visa-free access (the original deal was for the EU to give Turkey €6bn and visa-free access to the EU in return for Turkey allowing Greece to return to Turkey "all new irregular migrants"). This, according to the think tank SAT, could lead to 1.8m to 6m immigrants entering the EU and would, in all likelihood, provide populist parties with a tailwind." The Italian banking crisis — ongoing: Italian banks are in a dire state, with huge books of non-performing loans depressing their share prices and leading to calls for a possible state bailout that may violate EU laws (my colleague Will Martin has a great explainer on the whole thing here.) Credit Suisse says its clients are worried about possible overspill and the implications of the crisis for the rest of Europe — could it turn into another version of the 2012 sovereign debt crisis? The investment bank doesn't think so, saying: "Our economists estimate the funding gap at only €40bn (2.1% of GDP) with our banking team suggesting "not less than €30bn"." It adds that a "legal case can be made to allow state aid for Italian banks without bailing in bondholders." The crisis may come to a head tomorrow when the results of eurozone stress test are released, revealing just how bad a state the lenders are in.

Whether these events trigger a crisis or not, Credit Suisse says: "Many US clients believed Brexit meant the end of the euro... Outflows are close to record highs, valuations are back to Greek crisis lows."

HSBC pointed out in a recent note that outflows from European equities in the first half of the year are the highest on record, with $129 billion pulled in the first 6 months of 2016.

Things don't look good.