Analyse fra Commerzbank:
Greece: Answers to the main questions
There are many questions surrounding the current situation in Greece: What is likely to happen politically in the coming weeks? Will the elections delay ECB government bond purchases? Is the Greek government about to run out of money? How likely is a second haircut? Will Grexit happen? We give some answers to the main questions on investors’ minds at present.
How long will the political uncertainty last?
As the Greek election campaign reaches fever pitch, all eyes are on the opinion polls. The final ones will be published on 23 January, just two days before the election (Table 1). Even so, the outcome of the election remains uncertain. For one thing, polls have not proven very reliable in the past. Furthermore, it is unclear whether the small parties will gain the 3% of the vote required for them to enter parliament (Table 2, page 3).
What is relatively certain though is that no party will achieve an absolute majority of parliamentary seats. In the days after the election, the Greek President will call on the leader of the largest party to form a coalition. The pressure will be intense as he has only three days to do so. If he fails to form a government, the President can transfer the mandate to another party leader. If no government is formed, new elections will be held within 30 days, as was the case in 2012. In the best case, Greece would have a new government by mid-February, in the worst case new elections will be held in mid-March. On the other hand, there is little risk that Greece will fail to elect a new President; unlike the failed presidential election in December, the election ultimately cannot fail as in the event of a third ballot the candidate securing the majority of MPs votes is considered elected.
ECB: Will the Greek problems delay QE?
The Greeks will elect a new parliament on 25 January. Three days before, on 22 January, the ECB Governing Council will meet. Should it decide – as many expect – in favour of broad-based government bond purchases (QE), the radical left party SYRIZA could convince Greek voters that such purchases lower the risk of turmoil if a SYRIZA government were to embark on a collision course with the EU. It cannot be in the ECB’s interests for SYRIZA to hold such carte blanche.
To avoid this problem, the ECB Governing Council could postpone the QE decision to a later date. But one argument against this is that further parliamentary elections in Greece could take place in mid March if it is not possible to form a new government after the election on 25 January, which implies that the ECB would also not be able to decide on QE at its meeting on 5 March. The ECB will not want to have the timing of its decisions dictated by the vagaries of Greek politics. The ECB will therefore presumably announce QE on 22 January.
Date Event
23 January Publication of final election polls
25 January Parliamentary elections
In the days thereafter President calls upon the winner of election to form a government. The election winner has three days to do so. Mid-February New government or dissolution of parliament and new elections within 30 days. Extension of the second adjustment program which expires at end-February. The agreement of the German parliament is needed.
24 February Latest date for constituent meeting of new parliament
Election of President by the new parliament as soon as it is constituted as a body.
28 February End of current rescue programme Mid-March Should no government coalition be formed: new parliamentary elections
Source: Commerzbank Research
Dr Jörg Krämer
Tel. +49 69 136 23650
Christoph Weil
Tel. +49 69 136 24041 9 January 2015 3
Economic Research | Week in Focus
1) Survey of Pro-Olympic Circles, Source: Voice, Palmos Analysis, Interview, Rass, PaMak, Commerzbank Research However, to avoid the impression of a carte blanche for SYRIZA, the ECB could decide that any losses from the purchase of government bonds will not be allocated to national central banks according to the capital key, as usual, but that every national central bank would buy the bonds of its own country at its own risk. The Greek taxpayer would ultimately be liable if bonds bought under QE were to default. ECB chief economist Praet has called this a feasible solution, which is significant given that he is seen as belonging to the inner decision-making circle around ECB president Draghi. Less likely in our view is the scenario in which the ECB Governing Council solves the problem of the carte blanche by buying only bonds from countries with a high credit rating. This would contradict its unstated target of supporting countries with high debt. The proposal not to buy bonds from countries which are under the supervision of the troika (comprised of the EU, IMF and ECB), the so-called programme countries, is also unlikely in our opinion as Portugal and Ireland would then be disadvantaged relative to other countries.
Is the country about to run out of money?
Some observers fear that the Greek state will run out of money if it takes a considerable time to form a government; as long as no effective government is in power, there is unlikely to be any fresh financial aid. The last tranche of the EFSF loan (€1.8bn) and the yet-to-be-paid tranche of the IMF (€3.5bn) will only flow when the Troika has reached agreement with the Greek
government on the 2015 budget and the implementation of further reforms. Before then, euro finance ministers will have to further extend the rescue programme, due to expire at the end of February; otherwise the last tranche and the €10bn remaining in the bank rescue fund would be forfeited. That said, the Greek state would not go bankrupt in the near term even without the financial aid. In the first three months of the year expenditures (ex. debt servicing costs) are more or less covered by current revenues. Greece’s finance minister should be able to scrape together the funds for the interest payments and repayments (€4.5bn; Chart 1, page 3) that are due in the first quarter. At the end of September, he still had around €2bn in the till. The rest of the money can be borrowed on the money market and from Greek banks. If need be, the finance minister will delay paying current bills to suppliers. Larger debt repayments are then not due until July (around €3.5bn) and August (around €3bn).
How likely is a further haircut?
Irrespective of the election outcome, a new government will demand further relief from the euro countries on Greece’s public debt, which currently stands at over 175% of GDP. The government can refer to assurances made by euro finance ministers to consider further relief if the budget is running a primary surplus, which is currently the case. It is likely that agreement will be reached to further extend the maturities of the loans from the EFSF and euro countries, although these already exceed 30 years on average. Moreover, interest could be reduced – symbolically – by another few basis points although Greece already does not have to pay interest on EFSF loans (141bn euros) until 2022. However, euro finance ministers will not agree to a formal waiver of debt as politicians in creditor countries such as Germany would then have to explain to their voters that the assistance loans have been lost, contrary to what has always 4 9 January 2015 Economic Research | Week in Focus been maintained. This would be very unpopular and would strengthen euro sceptic parties such as AfD (Alternative for Germany).
In the case of private creditors, we believe a second haircut is unlikely (Chart 2). The damage this would cause would be much higher than the actual savings; private creditors currently only hold government bonds worth slightly over €36bn (just over 10% of public debt), for which Greece has to pay an average interest of only 3% until 2020.
Will there be a further rescue programme?
The additional debt relief will probably be a part of a new rescue programme which is likely to have a three-year term and a volume of €10bn. To this end, the unused funds of the bank rescue fund will be reallocated. This has the advantage that no new loan assurances will be needed from euro finance ministers. Furthermore, the creditworthiness of the Greek state will be strengthened by a so-called Enhanced Conditions Credit Line (ECCL) of the ESM rescue fund. This presupposes, however, that Greece undertakes to maintain its reform course. In return, a softer austerity course is likely to be agreed. A lower primary surplus will ensure a slow reduction of the public debt ratio, but will give the new government more scope with expenditure. And this is precisely what the SYRIZA leader Tsipras wants.
The residual risk of Grexit
In our base scenario (likelihood of 75%) we expect Greece to remain within the Monetary Union, even under a government led by SYRIZA. Firstly, Greece will not want to lose the support of the EU. Secondly, the governments of creditor countries are prepared to reach a compromise with Greece because they do not want to have to explain to their voters that assistance loans have been lost in the case that Greece leaves the Monetary Union. That said, the possibility cannot be ruled out that negotiations on a new rescue programme will break down and Greece will leave the Monetary Union (likelihood of 25%). If savers in Greece expect an exit, they will immediately withdraw their euro credit from Greek banks. Without ECB support, banks would very quickly become illiquid and would have to close their counters. In this case, the only option left for the Greek state would be to refloat banks swiftly with an own currency. But they could not prevent the Greek economy from collapse.
Source: Bloomberg, IMF, Commerzbank Research Source: IMF, ESM, Greek Finance Ministry, Bloomberg, Commerzbank
Research 9 January 2015 5
Economic Research | Week in Focus
Product idea: Knock-into forward EUR-NOK
Hedging with additional participation in rising prices
The Norwegian krone was strongly hit by the rapid slide in oil prices last month. Uncertainty surrounding the oil price trend and consequently also the Norwegian economy and monetary policy pose high depreciation risks for the NOK in the near-term. We recommend a knock-into forward to NOK sellers to hedge against this risk. With the petroleum sector generating around one quarter of Norwegian GDP, the slump in oil prices is a considerable drag on the economy. Although a combination of krone weakness, the Norges Bank’s surprise rate cut last month and more expansionary fiscal policy have reduced economic woes, there are several reasons to believe that the Norwegian economy is not yet out of the danger zone.
Given that – contrary to Norges Bank expectations – the oil price has fallen further since the start of the year, the central bank is very likely to lower its key rate once again. A rate cut of 25 basis points over the course of the year is already priced into the market. Yet there is the risk that the economic outlook might deteriorate in a way that will prompt the Norges Bank to cut its key rate more aggressively. After all, it is still unclear to what extent the lower oil price will dampen the mainland economy which has so far benefited from oil sector-driven demand. Moreover, ongoing low, or even further declines in, oil prices threaten to weigh further on investment in the Norwegian oil sector than assumed so far. Central bank governor Øystein Olsen has indicated that it would take a Brent oil price recovery to over USD 70 $/barrel to reduce the pressure on the central bank. Owing to these economic risks and thus the risk of more aggressive rate cuts by the Norges Bank we believe the risk of the krone depreciating further remains high near-term. Medium- to long-term, however, the NOK should strengthen again against the EUR. For one, the ECB – potentially as soon as at its next meeting – is likely to decide on broad-based government bond purchases, which will weigh on the EUR. For another, our commodities analysts are looking for oil prices to recover considerably over the course of the year. We advise NOK sellers to hedge against another strong near-term krone depreciation through a knock-into forward which also allows for a certain participation in any appreciation of the krone.
Product idea: European knock-into forward with ratio for an exporter in EUR-NOK
Spot rate (example) 9.0400
Hedging rate (worst case) 9.1000
Lower barrier (knock-in) 8.5500
Hedging nominal EUR 100,000
Leverage ratio 1 : 2
Term 6 months
Costs Zero cost
The European knock-into forward guarantees a fixed hedging rate of 9.10 (worst case). If EUR-NOK trades above the worst case at the expiry date, settlement will take place at this rate. If, at the expiry date, the fixing trades between the worst case and the knock-in (8.55), the investor may participate in favourable spot performance or potentially refrain from the currency exchange. If, at maturity, EUR-NOK touches or falls below the knock-in rate (8.55), a leveraged foreign currency sale will take place at the worst case rate (9.10).
Thu Lan Nguyen
Tel. +49 69 136 82878 6 9 January 2015
Economic Research | Week in Focus
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