Morgan Stanley has warned Germany could withdraw from the eurozone as the fallout from the Greek debt bailout continues.
Joachim Fels, Morgan Stanley's head of research, says the bailout for Greece may be necessary to avoid a wider European financial crisis, but he fears it also "sows the seeds for potentially even bigger problems further down the road", The Telegraph reports.
"The backstop package for Greece and the ECB's climb-down on its collateral rules set a bad precedent for other euro area states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness, and higher inflationary pressures over time," he says.
Fels says weak states would find it difficult to leave the EMU because they would face higher rates and other associated problems. However, he says it is a different story for Germany, which could see lower rates and might view an EMU exit as the best way of ensuring monetary stability.
"Obviously, we have not reached the end game yet. However, with the latest developments, such a break-up scenario has clearly become more likely," Fels adds.
"The risk is far from negligible and the consequences for financial markets would be very severe. Investors ignore the break-up risk at their peril."
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