EU to save banks but abandon state if Greece rejects austerity


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The EU will save its banks but abandon the state if Greece rejects austerity in the upcoming vote on 17 June, SEB’s chief strategist Johan Javeus projects in a presentation where he outlines what might lie ahead for the recession-hit country. Recent opinion polls suggest the country will get a pro-austerity government, but the final outcome is far from certain and since Greek law does not allow more polls until the election, Europe will be flying blind for a couple of weeks.

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EU to save banks but abandon state if Greece rejects austerity

  1. 1. What if Greece votes “no to austerity” Save the banks, abandonon June 17? the state
  2. 2. If Greece rejects austerity – EU will save the banks but abandon the state Opinion polls suggest a pro bailout government will get a majority. But this is far from certain and since Greek law does not allow more polls until the election Europe will be flying blind from now until June 17. Liquidity crisis. If Greece votes “no to austerity” the country will be cut of from further EU/IMF funding. Within a very short time (June?) the government will run out of money as tax payments are already being deferred by nervous tax payers. Contagion: The big contagion risk arises if Greek banks are allowed to collapse since that could trigger bank runs in Portugal, Spain and Italy. The Troika owns almost 80% of the total Greek government debt so a second Greek default on the government debt is unlikely to cause big problems for the private sector. Response: Immediate crisis response from the EU/ECB will be focused on preventing widespread bank runs across Europe. To do this effectively it is likely that also the Greek banking system will be saved by EU. The Greek state will be left to cope for itself and the country will face an even deeper economic recession. 2 ccy system? Introduction of a two currency system could be a way forward for Greece enabling it to devalue while still officially keeping the euro.2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 2
  3. 3. Greece on the verge of a bank run Domestic bank deposits Bank deposits have fallen sharply over the past two years. 240 240 According to Bank of Greece the decline in 220 220 deposits have accelerated since the May 6 200 200 elections that resulted in political chaos. EUR 180 180 Greece is running dangerously close to suffer a full blown bank run which could very 160 160 well be triggered by a “no to austerity” vote 140 140 on June 17. 120 120 04 06 08 10 12 Liquidity support for Greek banks (estimated) ECB repos (€79bn): As Greek government bonds are not eligible collateral for lending at the ECB Greek banks have had limited access to the regular ECB liquidity facilities during the spring. ELA (€46bn):If a bank is unable to fund itself through the ECB a national central bank can provide Emergency Liquidity Assistance to local banks. The collateral requirements for these loans are less strict than for regular ECB repos and decided by the Central Bank of Greece itself. Target 2 financing (€103bn): By using the EU payment system a country can provide financing to its banks by building up a payment deficit to the euro system. New capital (€18bn): As part of the second bail out package Greek banks were recapitalized on May 28 (the first step of a €45bn recapitalization plan). The banks received EFSF bonds that can be used as collateral to access ECB liquidity.2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 3
  4. 4. Global banks exposure to Greece At the end of 2011 European banks had a total exposure to Greece of about €70bn. French and Portuguese banks stand to loose the most if Greece abandons the euro while Spain and Italy have much less direct exposure. Note the numbers should have decreased further since end 2011 due to the government debt write down and continued efforts from banks to reduce their Greek exposure. The big risk from a collapse of the Greek banking system is not the direct losses it would incur on other EU banks but rather that it could trigger bank runs in other weak EMU countries. Total bank exposure to Greece per country 80 74.1 EUR bn 69.6 70 0.6% of GDP 60 50 40 1.6% of GDP 34.1 30 20 3.6% of GDP 10.3 8.1 10 6.2 3.4 2.7 1.8 1.7 1.5 0.7 0.7 0.6 0.2 0.1 0 d ds Italy ny d ga l l pe en UK n ium ce ri a n U SA Tota erl an Ir elan Japa Spai erl an a Euro Fran Swed Aust Portu Ger m Belg Swi tz N eth2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? Source: BIS 4
  5. 5. Likely counter measures to prevent contagion if Greece votes no to austerity The Greek banking sector would find itself in a very dire situation if Greece is cut off from foreign funding with a likely run on Greek banks. This could easily spread to other peripheral countries such as Portugal, Spain and Italy. EU governments response: Introduce a commonly backed EU deposit guarantee system to prevent bank runs in other countries. If Greece is also included in this system it would further limit contagion. Give ESM the ability to support banks with new capital directly or as an alternative lend earmarked money to Spain, Portugal and Italy to shore up their banks. Give Spain a emergency loan to shore up its banks. ECB response: A new LTRO with perhaps even more flexible collateral requirements Revival (and possibly large scale up) of the SMP program to by more peripheral bonds Another rate cut2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 5
  6. 6. Save the banks, abandon the state In the event of a “No to austerity” vote on June 17 there is a fine line between how much additional help the EU should provide to Greece and to what extent it should just leave the country to fend for itself. Save the banks: By saving the Greek banking system the EU can both limit contagion outside Greece and prevent complete anarchy in the Greek society (as would likely be the case if people were to see their savings go up in smoke). Abandon the state: At the same time EU cannot help Greece too much since that might tempt governments in other crisis struck countries to opt for the same “easy way out” as Greece. Thus the EU is unlikely to offer any more help to the government to cope with public deficits. The Greek economy would face a further large dip in GDP while many companies would default and unemployment would rise sharply.2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 6
  7. 7. Who owns the Greek government debt? Central government debt The central Greek government debt amounts to 400 180 €288bn (133% of GDP) 375 170 Since 2010 there has been a huge shift in whom are 350 160 EUR (billions) Greece’s creditors away from the private sector % of GDP 325 150 towards the public sector (i.e. EU, IMF and ECB). 300 140 The combined effect of massive official support to 275 130 Greece and the PSI deal has reduced the private and 250 120 other non public holdings of government debt to 225 110 only about 20% of the total. 200 100 EU and ECB now holds more than €200bn (71%) of 06 07 08 09 10 11 Greek government debt, almost 10 times what the EUR bn % of GDP IMF has lent Thus at this point it is primarily EU taxpayers Total Central Government debt €288bn who owns the Greek debt Others incl Private sector 60 Greek central government debt EFSF 107 €bn % of total EFSF 107 37% IMF EU (bilateral) 53 18% 23 ECB (SMP) 45 16% IMF 23 8% Private sector 60 21% Total 288 100% ECB (SMP) 45 EU bilateral 532012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 7
  8. 8. Without foreign funding Greece risks becoming a failed state Greece is still running a primary budget deficit meaning even if the government stopped payments on its remaining debt it would still have a shortfall. Government budget balance According to outgoing PM Papademos the government could run out of money already in 5.0 5.0 June as nervous tax payers have delayed tax 2.5 2.5 payments until the political situation has become clearer. 0.0 0.0 -2.5 -2.5 A “No to austerity” vote would result in: Greece immediately cut off from further -5.0 -5.0 borrowing from EU/IMF. -7.5 -7.5 Tax payments would come close to a halt as companies and households would try to hold on -10.0 -10.0 to any money they have. The government would be unable to pay -12.5 -12.5 pensions, salaries and other benefits. -15.0 -15.0 Many private companies would be unable to pay 02 03 04 05 06 07 08 09 10 11 their creditors and employees. Economy would quickly revert to barter. Primary balance (excl. interest rate costs) High risk of Greece turning into a failed state and Total budget balance with society in chaos.2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 8
  9. 9. The case for a parallel currency in Greece Government IOUs: As the Government is cut off from foreign borrowing and thus unable to pay pensions and salaries it would instead have to “pay” by giving out IOUs (i.e. a government promise to pay the owed amount of euros sometime in the future). An informal market would quickly establish itself where the Greek government IOUs could be exchanged for real euros at a substantial discount. Say hello to the “eurodrachma”. The IOUs would effectively begin to function as a parallel currency to the EUR and could be used within Greece to pay for food and other domestic goods and services. However, for obvious reasons it would not be accepted by foreigners as payment for imports. Experiences from Cuba. The system of parallel currencies is already in place in Cuba which have two official currencies. The convertible peso (CUC) is worth around 25 times more than the national peso (CUP). The government pays a part of pensions and salaries in convertible pesos and the rest in national currency. Crucial to save the banks. The transition to a 2-ccy system will be much smoother if the EU/IMF would agree to save the Greek banking system. Avoiding widespread banking defaults would mean that households and companies would not lose their euro savings and enable the euro to remain a hard currency used in Greece. Greece could remain in the EMU. By adopting a two currency system Greece could officially remain in the Euro zone and gradually, as the economy recovers, revert back to only using the euro. In reality, introducing the eurodrachma would accomplish the same effect as a traditional devaluation since it lowers domestic costs and wages.2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 9
  10. 10. Polls suggest a pro bailout government would get a majority Opinion polls estimate that New Democracy and PASOK will together get around 165 seats in the 300- member parliament, up from 149 today thus allowing them to form a pro-bailout, pro-austerity government The smaller parties behind the big 3 have together lost 12 percentage points since the May 6 election The percentage of those polled that want the country to remain in the Euro zone is still a very high at 85% Note: the Greek election law prohibits publishing of further polls until the election Opinion polls* May 6 2012 results % of votes diff vs May 6 % of votes seats New Democracy 25.5 6.6 18.9 108 Syriza 23.5 6.7 16.8 52 PASOK 11.9 -1.3 13.2 41 Independent Greeks 6.0 -4.6 10.6 33 Communist Party 5.1 -3.4 8.5 26 Golden Dawn 4.4 -2.6 7 21 Democratic Left 5.2 -0.9 6.1 19 Others 18.4 -0.5 18.9 0 Total 100 300 * average of 5 opinion polls taken on June 12012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 10
  11. 11. The Greek economy still in free fall Percent of GDP Percent y/y EUR bn Balance Balance Percent2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 11
  12. 12. DisclaimerImportant: This statement affects your rightsThe information in this document has been compiled by SEBMerchantBanking, a division of Skandinaviska Enskilda Banken AB (publ)(“SEB”).It is produced for private information of recipients and SEB is notsolicitingany action based upon it. All information has been compiled in goodfaithfrom sources believed to be reliable. However, no representation orwar-ranty, expressed or implied, is made with respect to thecompleteness oraccuracy of its contents and the information is not to be relied uponasauthoritative. Recipients are urged to base any investment decisionsuponsuch investigations as they deem necessary. To the extent permittedbyapplicable law, no liability whatsoever is accepted for any direct orconsequential loss arising from use of this document or its contents.Anypresented performance data is un audited. Your attention is drawn tothefact that SEB, a member of, or any entity associated with, SEB or itsaffiliates, officers, directors, employees or shareholders of suchmembersmay from time to time have holdings in the securities mentionedherein.THIS INFORMATION IS NOT INTENDED TO BE PUBLISHED ORDIST-RIBUTED IN THE UNITED STATES.SEB is incorporated in Stockholm, Sweden, with limited liability.SEB is regulated by Finansinspektionen (the Swedish FinancialSupervisory Authority). Confidentiality Notice: This information isconfidential and may not be reproduced or redistributed to anyperson.