What is the worst case scenario forthe Euro debt crisis?

This week has seen numerous developments in the ongoing European debt saga, including the UK effectively isolating itself from the mess and the proposed recovery measures.

As a currency trader, clients always ask me what will happen, and of course it is impossible to say, however, we can take a brief look at the worst case scenario, and some of the effects that this might have…

The very worst outcome is one that sees the financial markets completely lose confidence in the political leader’s ability to find a workable solution.

The ramifications would be identical to the 2008 meltdown but without the bailouts, because there are simply too many countries to bail out and not enough cash to save all of them. 

Scary enough, but what exactly would this mean?

Investors and institutions cease lending to all European banks and even governments. These Banks then collapse and the governments eventually run out of money, because a hefty portion of their annual budget comes directly from loans the stock markets and the value of the Euro completely implode and nobody can think of or at least implement any kind of plan in time.

To get a real picture of the absolute worst case scenario, think of Russia after the breakup of the Soviet Union or Argentina in the aftermath of their currency crisis, hyperinflation and a severe reduction in standards of living.

This maysound like a doomsday analysis, but remember this is simply the worst possibleoutcome and it’s important to understand that everyone in the Euro zone rightnow is doing everything they can to avoid these possibilities.

In the meantime all we can do as traders is keep our eye on the fundamentals and look for short term technical set ups.