LONDON – It would be fair to say that U.S. hedge-fund manager Kyle Bass does not expect the explosion in global debt in recent years to turn out well.
"This ends through war," Bass, the founder of Hayman Capital Management in Dallas, said. "I don't know who's going to fight who, but I'm fairly certain that in the next few years you will see wars erupt, and not just small ones," he told a recent conference.
But while many investors have, like Bass, bet heavily on chaotic sovereign default in countries such as Greece, three years of dogged diplomacy in Europe have so far wrong-footed the doomsayers.
And while some popular protests have erupted into violence, notably in Greece, the mystery for many analysts is why Europeans have not fought harder against escalating job losses, social spending cuts and tax rises. Unemployment in Greece and Spain has reached 25 percent.
Bass bases his apocalyptic view on his calculation that credit market debt has reached 340 percent of global output, saying the world has never lived in peacetime with such a burden.
He says some societies will not withstand the social strain when trillions of dollars of debt have to be restructured, inflicting hefty losses on millions of investors.
War in the euro zone - which Bass does not expect to survive in its present form, if at all - looks far-fetched, to put it mildly.
Europe's political elite demonstrated in 2012 its determination to preserve the euro. Prophecies that doom has merely been delayed could well prove yet again to be wide of the mark.
But it is reasonable to ask how much those caught in the cross-fire between creditors and debtors will stand for as the euro's battle for survival drags on.
Take Portugal, now into the third year of recession, where the president has asked the Constitutional Court to rule on the legality of unprecedented tax increases.
Adelino Maltez, a political scientist at Lisbon Technical University, said Portugal "got drunk on Europe" during the boom years. "Now for the first time we have the feeling that we have nowhere to go," he said. "For 2013 the Portuguese lack a sense of mission. There is a recognition of collective powerlessness."
In other words, with scant prospect of a swift return to growth, the risk in 2013 is less outright conflagration in the single-currency area than a fraying of social and political ties and an insidious erosion of hope.
WATCH GREECE AND SPAIN
Jean-Dominique Giuliani, who heads the Robert Schuman Foundation, a pro-European think tank in Paris, says difficult reforms must continue because the crisis shows no sign of going away.
"Changes will now be constant and will demand a great deal of populations, overturn societies, surprise political leaders and unsettle experts," he said in a commentary on his group's web site.
Charles Robertson, chief economist at Renaissance Capital in London, is among those wondering how much more voters are prepared to sacrifice. He expects Greece to quit the euro this year and says Spain might follow by the end of 2014.
Spain has already endured one year of unemployment above 25 percent but will probably have to manage three more in order to meet the financial targets set by its international creditors.
"No economy (as far as we are aware) has ever sustained this unemployment rate and maintained a peg to a fixed exchange rate," Robertson said in a report.
Most damaging of all, he said, was the absence of hope: "For households, wages are still likely to fall to boost competitiveness. Households are deleveraging and defaulting, not borrowing more to fuel consumption."
A vibrant black market and a still-generous welfare state mean unemployment is probably sustainable at higher levels, and for longer, than ever before, Robertson acknowledged.
Still, by 2014, Spanish voters will have had time to conclude that the reforms introduced by Prime Minister Mariano Rajoy, whom they elected in 2011, have failed to deliver prosperity. "People may then take to the streets and demand change," Robertson argued.
Even though the consensus has swung towards the euro staying intact, many economists fret about the broader ramifications of protracted austerity.
A possible explanation suggested by Deutsche Bank for Europe's relative social peace to date is that the burden of adjustment has fallen disproportionately on young people.
In Spain, for example, the employment rate for the under-25s tumbled from 39.1 percent in mid-2007 to 18.3 percent in mid-2012, a fall of 20.8 percentage points. For the 35-49 age group, with a higher level of protection against layoffs, the drop over the same period was 8.9 percentage points.
This mix of "youth sacrifice" and relative economic security for the bulk of the population might be why street protests have failed - except in Greece - to translate into a big shift in votes for radical parties, according to Gilles Moec, a Deutsche economist.
But the potential economic cost is huge. With fewer youngsters working, Italy and Spain have suffered a loss in productivity of about 2 percent, boding ill for future growth, Moec estimated.
The textbook answer is to push policies that end the divide between hard-to-fire ���insiders' and typically young ���outsiders' on precarious short-term contracts.
The risk, however, is that these and other structural reforms become discredited because voters associate them with declining living standards and rising inequality, according to Simon Tilford, chief economist at the Centre for European Reform, a London think tank.
"The consequences are likely to be far-reaching. Not only will governments struggle to push through the needed reforms, but there is a risk of a broader backlash against the market economy and the European Union," he said.
(Additional reporting by Daniel Alvarenga in Lisbon; Editing by Ruth Pitchford)