Bottom line: In our view, Greece will not default, nor will it come close to default. In the short term, however, pressure on Greek assets may persist until the government produces a credible fiscal consolidation plan.
What's the fiscal situation? Serious, but not unmanageable. Debt/GDP should be in the region of 110% this year and around 120% next year. Arresting this trend will require substantial fiscal consolidation in the coming years. The newly elected government has so far not convinced the European Commission (EC), or financial markets, that it is willing to use its political capital to effect the necessary structural changes to get public finances, and the economy, back on track.
What needs to be done? The first priority is to get the budget deficit (12.7% this year according to EC estimates) under control. The EC - and ourselves - are concerned that the consolidation the government is planning in its 2010 budget may not be sustainable as the bulk of it stems from one-off, rather than permanent, factors. However, getting the budget deficit under control is unlikely to be enough to ensure fiscal sustainability. The high debt ratio and effects of adverse demographics impacting the economy from 2020 onwards mean that Greece needs to implement wide-ranging structural reforms (see From Athens to Dublin, November 2, 2009). The reforms should create jobs and the economic growth necessary to reduce the debt ratio over time.
What's the matter with Greek banks? The Greek central bank has warned Greek banks to prepare for a time when the ECB will be less generous in its liquidity provision. (On IMF numbers, Greek banks have been the recipients of 5.5% of total ECB liquidity provision.) From the available evidence, Greek banks at the very least don't seem to be in a worse state than the average of their European peers. According to our bank analysts, Greek banks are fundamentally sound. For example, their loan-to-deposit ratios are below the European average, and the deterioration in NPLs has been less pronounced than for, say, Spanish banks. We believe that Greek banks are getting hit because of public finance concerns. There is no reason to expect them to be the source of macro instability.
What about Greece's credit rating? Greece is currently still comfortably investment grade. It's rated A1 (outlook stable) by Moody's, A- (outlook stable) by S&P and A- (outlook negative) by Fitch. Even three downgrades by S&P or Fitch would still have Greek bonds at investment grade and therefore acceptable collateral with the ECB. Given recent developments in the fiscal balance (including revisions to deficit and GDP numbers), and given that the new government so far does not seem to be willing to act decisively, a downgrade (or change in outlook) would probably not be a huge surprise to the markets. That said, a downgrade could trigger a further rise in yields as many investors would no longer be able to hold Greek bonds due to internal risk-management reasons.
Will Greece default? For a country like Greece, becoming physically incapable to pay its creditors is very unlikely, in our view. A developed country government would almost always be able to raise sufficient funds to pay bondholders - through taxation, levies, etc. - provided that it is politically willing and able to do so. The current government was elected less than two months ago and has a comfortable majority in parliament. If pushed, we are convinced that the government would do whatever is necessary to avoid default.
Perhaps just as importantly, we believe that Greece will not be allowed to default since, at the current juncture, a Greek default would have systemic implications:
•· It would put pressure on other heavily indebted countries in the Euro-zone, and possibly beyond;
•· It would put pressure on the European banking system since many banks hold Greek bonds for their high yields.
This means Greece would be ‘prevailed upon' by the EU not to default (more below).
What if Greece faces a buyers' strike? Greece is planning to issue €55 billion next year. Yields may have to climb substantially for that to be absorbed, and the costs of servicing the debt, currently around 5% of GDP, would also climb. Even in that case, default is unlikely, in our view. Some perspective is useful. In 1994, the Greek government paid 12.7% of GDP in interest. In 1992, the implicit interest rate on the debt (interest payments divided by last year's debt) was 16.2% - with a much shorter maturity profile than is currently in place. Right now, Greek 10-year bonds yield 5.2%. All this goes to show that, with sufficient political will, even very high debt service costs can be met.
Can Greece be kicked out of the euro? No. There is no such provision in the Maastricht treaty. A country can, however, leave voluntarily.
Will Greece leave the euro? No, we don't believe so. Apart from it being unthinkable politically - an overwhelming majority of society and most mainstream political parties are in favour of the European project - it would be against Greece's best economic interest, whatever its intentions. Announcing that it will leave the euro could cause a bank run as well as a run on all Greek assets. The new Greek currency would likely depreciate heavily against the euro, making it more difficult for Greece (public and private sector) to repay debt.
Where do we go from here? Greece will very likely be put under ‘enhanced budgetary surveillance' by the EC in January, in our view. In practical terms, this means that the government would have to report every three months to Brussels what progress it has made in terms of reining in the budget deficit and implementing structural reforms. Our central case is that the government, not least because of this pressure, will gradually introduce tougher measures over time, beginning with January's Stability Programme Update - a submission intended to explain to the EC how the budget deficit will be brought down to 3% of GDP over the next years.
What's the worst-case scenario? As mentioned above, Greece will do everything to avoid a possible default, in our view; further, we think it would not be allowed to fail: before Greece comes into significant difficulty, the European Union would probably intervene by making funds available in the form of emergency loans. Finally, there is also the possibility that the EU would want to make an example of Greece by not intervening. In that case, we think the IMF would likely step in, probably with a standard Stand-By Arrangement.
http://www.morganstanley.com/views/gef/archive/2009/20091130-Mon.html
NOMIZΩ ΟΤΙ ΠΡΟΚΕΙΤΑΙ ΓΙΑ ΜΙΑ ΨΥΧΡΑΙΜΗ ΜΑΤΙΑ, Η ΟΠΟΙΑ ΓΡΑΦΤΗΚΕ ΜΕ ΠΙΟ ΚΡΎΟ ..ΑΙΜΑ.
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