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SEB Research: IMF leads enlarged rescue package for Greece
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SEB Research: IMF leads enlarged rescue package for Greece

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SEb's analysts see a large and credible IMF package as the most likely scenario to resolve the Greek debt issue. This is also what is needed to calm markets. Recent comments from EU officials also …

SEb's analysts see a large and credible IMF package as the most likely scenario to resolve the Greek debt issue. This is also what is needed to calm markets. Recent comments from EU officials also rules out debt restructuring for Greece. According to SEB's experts a proposal must be presented within coming days to calm financial and political nervousness.

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  • 1. Trading Strategy Economic Research The Greek drama Outlook and market implications 1
  • 2. Main scenario: IMF leads enlarged rescue package for Greece IMF can act more quickly than EMU-16 and is not restricted by domestic policies IMF has large financial resources, currently in the neighbourhood of some USD +500bn and they can be increased further by commitments also from non-EU countries (e.g. China, Japan). The money will be paid out in tranches over a long period and conditioned on adherence to the agreed consolidation programme. Previous IMF led packages have amounted to between 20% and 40% of GDP (e.g. Latvia, Hungary, Iceland). The Greek package will likely be considerably larger. Current speculations range between a sizeable increase to EUR 150bn (amounts to roughly 60% of GDP) and a more modest increase by EUR 10bn. We see a large and credible IMF package as the most likely scenario. This is also what is needed to calm markets. Recent comments from EU officials also rules out debt restructuring for Greece. A proposal must be presented within coming days to calm financial and political nervousness. 2
  • 3. Greek credit downgrade to junk Facts and outlook Greece S&P downgraded three notches to BB+ (from BBB+) non-investment grade. Fitch and Moody’s retain investment grade rating with Moody’s still highest at A3 (equal to S&P A-) on review for further possible downgrade. Portugal S&P downgraded two notches to A- (from A+). ECB collateral rules state at least one official rating has to be investment grade for lending from the ECB. Trichet has stressed on several occasions that we will not see a default in Greece. Our interpretation is that the ECB will find a way to solve the problem, should ratings fall below the threshold. However, Greek banks should always have access to the short- term funding (lender of last resort) provided that they are deemed solvent. 3
  • 4. Market implications of a new IMF package Short-term effects USD, CHF have been the obvious safe haven currencies and would weaken somewhat on new IMF rescue package More muted reactions for SEK and NOK assets - upside pressure on Swedish bond yields German interest rates will rise - relief rally for PIIGS debt, especially shorter maturities (2Y) Stock market may recover, but declines have so far been fairly limited Macro - longer term Double-dip risk has increased Policy stimulus will remain in place for a longer period Large divergence in European growth, downside risk for EMU growth 4
  • 5. What could happen if Greece defaults? A default does not necessarily mean that Greece is forced to leave the EMU but it may still opt to do so: 1. If Greece defaults on its debt, the cost of leaving the euro at the same time is small. Greece can get an economic boost from a currency devaluation when switching back to the drachma without worrying about the increased cost of servicing its EUR debt (on which it has already defaulted). 2. The pressure on the other PIIGS countries will increase dramatically if Greece defaults and even more if it leaves the euro. Concerns will increase about these countries' ability to acquire funding in the market. Why should the other PIIGS get help from the EU/IMF when Greece didn’t. Portugal will be the second country cut off from private funding followed by Spain and Ireland, possibly Italy as well. 3. If one country leaves the euro, the whole project risks crumbling. 5
  • 6. Large exposure to PIIGS for core EMU banks While German, French banks have a Consolidated foreign claims of reporting banks, bn EUR large exposure to Greece (including Claims vis-à-vis Ger Fra Gre Ire Ita Port Spa Greece 45 79 … 9 7 10 1 French direct ownership of Greek Ireland 184 52 1 … 17 9 15 banks) it is a small share of their total Italy 190 508 1 46 … 5 47 foreign claims (1.5%-2% of foreign Portugal 47 45 0 5 7 … 85 claims). Spain 238 211 0 32 31 29 … Total 704 895 2 91 62 53 148 Main risk is contagion to other PIIGS. Source: BIS, Dec 2009, ultimate risk basis PIIGS amount to around 20-25% of total foreign claims for German and French banks (16 and 10% resp. excl. Italy). PIIGS share of Euro-zone GDP, % Also, large inter-linkage between PIIGS with for example considerable exposure 2008 to Portugal in Spanish banks. Portugal 1.8 Spain 11.8 Greece 2.6 Italy 16.9 Ireland 2.0 6
  • 7. PIGS 2010-11 Debt maturities Portugal • May 20, 2010 - EUR 5.6bn Italy • July 23, 2010 - EUR 4.5bn • Q2 2010 - EUR 80bn • Sep 17, 2010 - EUR 2.7bn • Q3 2010 - EUR 102bn • Nov 19, 2011 - EUR 2.6bn • Q4 2010 - EUR 72bn • Jan 21, 2011 - EUR 2.1bn • Q1 2011 - EUR 73bn • Feb 18, 2011 - EUR 1.8bn • Q2 2011 - EUR 35bn • Mar 18, 2011 - EUR 2.0bn • Q3 2011 – EUR 71bn • Apr 15, 2011 – EUR 4.7bn • Q4 2011 – EUR 16bn • Jun 15, 2011 – EUR 5.0bn Spain Greece • Q2 2010 - EUR 21bn • May 19, 2010 - EUR 8.5bn • Q3 2010 - EUR 40bn • July 23, 2010 - EUR 2.4bn • Q4 2010 - EUR 18bn • Oct 15, 2010 - EUR 1.3bn • Q1 2011 - EUR 19bn • Mar 20, 2011 - EUR 8.8bn • Q2 2011 - EUR 26bn • May 18, 2011 - EUR 6.5bn • Q3 2011 – EUR 21bn • Aug 20, 2011 – EUR 6.0bn • Q4 2011 – EUR 21bn • Dec 29, 2011 – EUR 4.6bn Source: Bloomberg 7
  • 8. The risks for other PIIGS - Focus on Portugal and Spain Portugal is likely to need financial support, probably of the same size as for Greece For the other PIIGS, the picture is somewhat more mixed – Spain has a large budget deficit and the banking sector is heavily exposed to the troubled housing/construction markets. On the other hand, Spanish households have a high saving ratio and reasonable low indebtedness. Moreover, Spain has experienced quite substantial improvements in the current account. Portugal Bond maturities (EUR, bn) Spain Bond maturities (EUR, bn) 90 84 90 20 20 18 77 18 18 80 80 16 16 16 70 70 14 61 14 14 60 60 52 12 12 50 47 50 10 10 9 8 10 40 40 8 8 7 8 30 29 6 6 30 25 30 6 6 17 20 16 20 4 4 2 2 10 10 0 0 0 0 10 11 012 13 14 015 16 17 018 19 10 11 12 13 14 15 16 17 18 19 20 20 2 20 20 2 20 20 2 20 20 20 20 20 20 20 20 20 20 20 8
  • 9. Government finances High debt levels for Greece and Italy, other PIIGS not that far from Euro-zone average Large budget deficits in Greece and Ireland. Spain and Portugal slightly higher than Euro-zone average. Less of a problem in Italy Government deficit,% of GDP 5.0 5.0 2.5 2.5 0.0 0.0 -2.5 -2.5 -5.0 -5.0 -7.5 -7.5 -10.0 -10.0 -12.5 -12.5 -15.0 -15.0 02 03 04 05 06 07 08 09 10 11 Greece Spain Ireland Italy Portugal 9
  • 10. The root of the PIIGS countries problems Greece has lost more than 50% of its competitiveness vs. Germany since the start of EMU The other PIIGS are almost as worse off Internal devaluations are needed to restore competitiveness. 10
  • 11. Small export sectors in PIIGS Correction of current account balance will have to come from low domestic demand Private consumption in Spain and Ireland has declined by 7- 8% in 2008-09, investments by more than 30% Export, % of GDP 90 Belgium 90 Ireland 80 Netherland 80 70 Austria 70 Denmark 60 Sweden 60 Germany 50 Finland 50 40 Portugal 40 UK Italy France 30 Spain Greece 30 20 20 10 10 11
  • 12. Low Swedish exports to PIIGS Goods export to PIIGS countries % of total goods export Ire. Gre, Spa. Ita. Por. PIIGS Ireland - 0.4 4.2 3.5 0.5 8.6 Greece 0.4 - 2.9 11.5 0.7 15.5 Spain 0.5 1.4 - 8.1 9.1 19.0 Italy 0.4 2.1 6.5 - 1.0 10.0 Portugal 0.6 0.4 25.6 3.7 - 30.2 France 0.7 0.9 8.3 8.8 1.3 19.9 Sweden 0.5 0.5 2.3 3.1 0.5 7.0 UK 7.5 0.7 4.1 3.8 0.6 16.6 Germany 0.6 0.8 4.3 6.3 0.8 12.8 = 12
  • 13. Inverted yield curve as markets are pricing a Greek default When a default is becoming Greece/German rate spreads priced by the market the market is effectively pricing in a haircut 1750 1750 on the bonds 1500 1500 For an investor to still get his money back (after a hair cut) 1250 1250 the shorter the maturity of the 1000 1000 bond the higher the interest rate 750 750 needs to be. Thus the yield curve gets 500 500 inverted with the 2Y yield much 250 250 higher than the 10Y 0 0 If a sizable financial aid Jan Feb Mar Apr package is delivered which 10 covers the Greek debt maturing 10Y CDS spread 10Y Gov spread in the coming 2 years as well as 5Y CDS spread 2Y Gov spread expected budget deficits until 2011 then the 2Y bonds should strongly outperform 13
  • 14. Disclaimer This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice. 14