Presentation: Scenarios for Greece – Summer Crunch Time€¦ · Now Before (Jan 2015 ) 28.6 61.4 22.8 72.3 Who is responsible for delay in negotiations? Do you agree with the way

Scenarios for Greece �Summer Crunch TimeScenarios for Greece Summer Crunch Time

Pernille Bomholdt Henneberg Thomas Harr Anders Møller LumholtzSenior Analyst, Euro area macro research Global Head of FICC Research Chief Analyst, FI Research

22 June 2015

Senior Analyst, Euro area macro research Global Head of FICC Research Chief Analyst, FI [email protected] [email protected] [email protected]

Investment Research

www.danskebank.com/CI Important disclosures and certifications are contained from page 14 of this report.

Greek crunch time �we expect a deal late this week

• The latest development in Greece is in line with our expectation as the chicken game has continued and intensified while we approach the summer crunch time.

O i i i ill h G ill ll bli k d i h b • Our main scenario is still that Greece will eventually blink and stay in the euro area, but a deal is also likely to require some concessions from Germany and the other creditors.

• The outstanding gaps between Greece and its creditors include agreeing on fiscalt t th i l t t d i t fmeasures to meet the primary surplus targets and pension sector reforms.

• This week�s meetings may be the last opportunity for a high-level agreement betweenGreece and the creditors followed by a deal late this week.

• This reason for this is that the current bailout programme expires at end-June and time is also needed for approval of an agreement in the Greek and German parliaments (amongothers).

• However, the end-June deadline is political, as no bond is set to expire and a missedpayment to the IMF is not characterised as a default in e.g. the S&P framework.

2www.danskebank.com/CI

Banks kept alive by ECB�s ELA facility

Deposit flight from Greek banks � but still no �bank run� ECB�s ELA facility is filling the gaps

90 ECB ELA to GreeceEUR bn

210

220 Household and corporations' deposits with Greek banks EUR bn

80

85

180

190

200

210

0.6

0.8

1

1.2

1.4EUR bn Deposit fligth Mon 15 June -Fri 19 June

(Source: Different media sources)

75

150

160

170

180

0

0.2

0.4

Mon Tue Wed Thur Fri

65

70

120

130

140

605 February 15 05 March 15 05 April 15 05 May 15 05 June 15

ELA to Greece (bn EUR)

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Deposits with Greek banks


Source: Danske Bank Markets

Crisis has derailed fragile recovery

New crisis has derailed Greek recovery� � debt mountain remains unsustainable


Source: IMF, National Statistical Service of Greece, Danske Bank Markets

Greek population against �Grexit� - Germans are turning

Greek population against Grexit� � while Germans are tilting towards �Grexit�

Greece

Yes NoNow Germany

Now Before (Jan 2015)Yes No28.6 61.4

22.8 72.3

Who is responsible for delay in negotiations?

Do you agree with the way gov. And pm are handling negotiations?

Do you personally want tougher stance even if it means grexit?

Gov.

52 1

( )Percentage in favour of 'Grexit' 51 33

Percentage in favour of Greece remaining in the euro?

41 55

Yes NoShould the EU make further concessions? 24 70

Now

Who is responsible for delay in negotiations?

In your opinion will there be an agreement in the end?

Would you personally like an agreement?

52.1

Proposal

Yes

58.2

76.8

Should the EU make further concessions? 24 70

Source: ZDF

If you were to choose between the creditor proposal and grexit, what would you choose?

Source: http://.protothema.gr/

Proposal

49.7


Greek crunch time � the timeline

E d JGreece will eventually blink while creditors make some concessions

Still has the option to get a deal

End-JuneGreece�s current bailout

extension expires

25-26 June 30 June 13 July

Ongoing chicken game Harsh negotiations are unavoidable

Knife-edge whether Greece has enough money over summerThird bailout programme likely if Greece cooperates now

20 July 20 August22 June

S lik th d dli

EU leaders SummitTsipras and Merkel attend

EUR1.6bn IMF repayment (June payments bundled)

EUR3.5bn ECB redemption

EUR0.5bn IMF repaymentEUR3.2bn ECB

redemptionExtraordinary Eurogroupfinance minister meeting

Emergency EU leaders Summit on Greece Seems like the deadline

but high-level agreement needed on the Summit on

22 June

A missed pa ment to the IMF o ld not be Time is needed for approval of an agreement End-June deadline is political as no bond is

Summit on Greece

ECB set to review ELA for Greek banks

A missed payment to the IMF would not be characterised as a default by S&P

Time is needed for approval of an agreement in the Greek, German and other parliaments

pset to expire at the end of the month. Could

have implications for ECB�s ELA facility



Most of Greece�s debt is to �the institutions�

June IMF payments are bundled to end-of-month Most of Greece�s debt is to �the institutions�

9EUR bn

IMF payments June* 05 Jun: EUR 0 31bn

Greek Debt Composition, Ult. Mar 2015, EUR bnB d d N t 81 5

6

7

8

05 Jun: EUR 0.31bn* 12 Jun: EUR 0.34bn* 16 Jun: EUR 0.57bn* 19 Jun: EUR 0.34bn

TOTAL: EUR 1.57bn (new deadline 30 June)

Bonds and Notes 81,5

Bonds issued domestically 63,8

Bonds issued abroad 2,6

Securitization issued abroad 0,1

Short-term notes 15,0

3

4

5

6

Payment to the ECB not likely without furhter assistance

*20 Jul 3.5bn*20 Aug 3.2bn

Loan 231,2

Bank of Greece 4,3

Other domestic loans 0,1

Special purpose and bilateral loans 7,1

Fi i l S M h i l (EFSF IMF d bil l) 205 0

1

2

3 Financial Support Mechanism loans (EFSF, IMF and bilateral) 205,0

Other external loans 5,0

Repos 9,8

Total 312,7

0jun jul aug sep okt nov dec

IMF loan Eurosystem bonds GGB coupons T-bill


Source: IMF, PDMA Bloomberg, Danske Bank Markets

Direct Greek exposure amounts to 3-4% of euro area GDP

Direct exposure via official aid facilities Target 2 balances

EUR bn EFSF SMP TotalG 38 29 88

Bilateral loans

Intra eurosystem liabilities

Germany 14 38 7 29 88France 11 29 5 23 68Italy 9 25 5 20 59Spain 7 17 3 14 41Total 53 131 27 115 326


Source: ECB, BIS

Four scenarios for Greece�s future

A new deal is reached (Main scenario)

Programme extended Defaults but no Grexit Grexit

• Chicken game until the last minute

• Tsipras fights to the very end

• Decision is taken at highest level, most likely at the 22 June Summit

• Greece maintains tough stance

• Creditors do not want Grexit

• Capital controls (Freezing of bank deposits) are possible

• Greece defaults on IMF payment

• The ECB removes the ELA

• Capital controls (freezing of deposits and restrictions of external payments) are imposed

• Greece defaults on IMF payment

• Greece cannot pay state wages

• Capital controls (freezing of deposits and restrictions of external payments) are likely

A deal will be reached as the Greek leaders will blink eventually

Creditors extend the current bailout programme beyond June

p y ) p

Greece leaves the euro and the �New Drachma� is introduced

p y ) y

Greece defaults but is allowed to stay in the euro

Creditors give some concessions. A third bailout package is agreed.

The current government collapses, snap election and a new government

is formed

The can is kicked down the road as harsh negotiations end in deadlock.

Political crisis with referendum, snap election or new government

A new election may be called, Debt relief is still needed

ECB Summer repayments big hurdle. If the ECB removes the Greek ELA

funding, Grexit is very likely.

A new election may be called, Debt relief is still needed

Euro leaders respond strongly and issue a statement to mitigate

contagion. The ECB commit to �do whatever it takes�



Grexit scenario: Chain of events

• 50% of the Greek population prefers creditor proposal over Grexit• Tsipras wants to remain in power• German leaders and the creditors do

•A Tsipras-Merkel deal might not be approved by the Greek parliament •Tsipras sticks to election promises • Creditiors will no longer work

PROS GREXIT CONS GREXIT

30 June 1 July

German leaders and the creditors do not want a Grexit

Creditiors will no longer work together with the Greek government

22-28 June 6 July - ?

Greece does not repay debt to the IMF Greek Central Bank

introduces �New Drachma�

The ECB removes ELA funding

No deal between Greece and creditors Greek government

issues IOU to pay state salaries and

pensions IMF sees the missed payment as default

Bank run intensifies and banks become

illiquid

Grexit is announced

Eurogroup publishes joint statement

Political support vanishesReferendum on �no

agreement�

payment as default. ECB deems Greek

sovereign insolvent

illiquid

Political instability as Greek population

wanted a deal

ECB commits to do �whatever it takes�

Government reshuf-fles or snap elections

Greek authorities impose capital

controls (deposit freeze and

Banks are classified as insolvent and

official plans emerge


freeze and restriction on

external payments)

p gto recapitalise and

possibly nationalise them


European banks� exposure to Greece is limited

European banks� exposure to Greece is limited Contagion to other periphery markets reduced

USD bn

250

300

350

European banks exposure to Greece

150

200

0

50

100

05 06 07 08 09 10 11 12 13 14


Source: BIS Foreign claims by nationality of reporting banks, immediate borrower basis, Bloomberg, Danske Bank Markets

Greece�s destiny will impact elections in Spain and Portugal 2015

Government debt in the peripheral countriesPortugal general election

Between 20 Sep and 11 Oct

Spain general election Before 20 Dec

2016

Ireland general election Before 3 Apr

2017

Portugal local election In or before 2017

2018

Italy general election In or before 2018

2019

Spain local election May 2019

Ireland local election


Source: IMF, Danske Bank Markets

Ireland local election 2019

Grexit �what if? Implications for euro and Scandi markets

• Euro govies: Under a Grexit, the periphery would remain under pressure initially. As we anticipate a strong policy response, we would expect the biggest price action to happen in the run up to the event. We would expect a risk-off move to quickly be replaced by a policy-induced rally in the periphery. M di ld � i i k i � b i d i h i h Medium term, we would not expect a new �exit risk premium� to be priced into the periphery.

• Euro equities: In the event of a Grexit, we expect European equity markets to react negatively initially, but we do not expect a longer-term correction.

D i h FX d FI k W b li G i ld b i i f DKK d D i h d • Danish FX and FI markets: We believe a Grexit would be positive for DKK and Danish government and mortgage bonds. Save-haven demand and the yield pick-up of Danish assets versus German ones will drive capital inflows into Denmark.

• Swedish FX and FI markets: A Grexit would likely trigger also inflows into Swedish markets but to a y ggmuch smaller extent than in 2011-12 due to a likely strong policy response from the Riksbank.

• Norwegian FX and FI markets : Here we would also not expect similar inflows into FX and FI markets as in 2011-12. We would expect the spread between bunds and NGBs to widen in the longer end, with a G it l li htl iti f NOK Grexit only slightly positive for NOK.


DisclosuresThis research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (�Danske Bank�). The author of this research report is PernilleBomholdt Henneberg, Senior Analyst.

Analyst certificationEach research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst�s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.

RegulationDanske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request.

The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts� rules of ethics and the recommendations of the The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association.

Conflicts of interestDanske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank�s research policies. Employees within Danske Bank�s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank�s Research Departments are organised independently from and do not report to other business areas within Danske Bank.

Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions.

Financial models and/or methodology used in this research reportCalculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each i di id l i i d/ D i b b i d f h h individual security, issuer and/or country. Documentation can be obtained from the authors on request.

Risk warningMajor risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text.

Date of first publicationS h f f hi h f h d f fi bli i


See the front page of this research report for the date of first publication.

General disclaimerThis research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. p , , p y (financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (�Relevant Financial Instruments�).

The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research reportreliance on this research report.

The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report.

This research report is not intended for retail customers in the United Kingdom or the United States.

This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank�s prior written consent.

Disclaimer related to distribution in the United StatesThis research report is distributed in the United States by Danske Markets Inc a U S registered broker dealer and subsidiary of Danske Bank pursuant to SEC Rule This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to �U.S. institutional investors� as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to �U.S. institutional investors�.

Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the

li bl i f U S j i di iapplicable requirements of a non-U.S. jurisdiction.

Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.


Documents

Presentation: Scenarios for Greece – Summer Crunch Time€¦ · Now Before (Jan 2015 ) 28.6 61.4 22.8 72.3 Who is responsible for delay in negotiations? Do you agree with the way