Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Greece Soverign Debt Crisis, The Way Forward, if Any!

Economics / Global Debt Crisis Feb 11, 2010 - 07:46 AM GMT

By: Vishal_Damor

Economics

Best Financial Markets Analysis ArticleMorgan Stanley did quick and extensive scenario analysis along with an update of the Greece situation. Presented below are key highlights and my read.


At present, the Greek CDS spread at 355bp is pricing in a 28% default probability over the next 5 years. This is up from a 9.5% cumulative default probability back in June 2009. While we take real issue regarding implied default probabilities on sovereign CDS, it is nonetheless a useful point of context. Although Greece’s inclusion in the EU complicates matters somewhat, we have yet to see a sovereign or credit “crisis” bankruptcy-averting restructuring deal at a meager price point of 355bp.

Morgan Stanley Quotes:

Markets are in the early stages of differentiating risks. In its simplest form, the negative market reaction around the sovereign debt concerns of peripheral Europe is a natural by-product of “the end of the
easing,” both real and perceived. From necessary fiscal tightening in Europe to monetary tightening in China, the markets are simply reacting to the withdrawal of liquidity. With respect to the peripheral Europe situation, the combination of fiscal austerity and contagion concerns, which, not surprisingly, are linked, will persist for some time to come, and thus so will volatility.

Greeks contagion effects: Morgan Stanley believes the effects from Greece are far more than what the government is pricing in.

The lesson from the financial crisis of 2008 is that interrelationships across the global banking system correlate markets and allow contagion to spread. And that is the case for Europe today, where the banking system is a critically important provider of capital/credit (relative to the US), creating even more risk around contagion. For example, out of the $748B debt outstanding for Spain, 32% is owned by German banks and 25% by French banks. For Portugal’s $165B in debt, 51% is owned by Spain. These strong linkages could imply a lower tolerance by European authorities, causing them to act early, possibly too early. Lastly, in the extreme (low probability) bear case in which the markets systematically begin punishing countries based on their total indebtedness, the obvious spillover effects to the G3 become quite disturbing.

Greece crisis and it potential probable solution and consequences:

  1. Bailout by Germany/France consortium: Probablity of 70% and the best possible solution under the circumstances: A bi-lateral loan from EU countries—led by Germany and France—to Greece. Loan terms could be punitive to encourage Greece to take painful but necessary actions. In addition to the proposed European Commission requirement (to be voted on Feb 15/16) that Greece must report at least once a quarter on its fiscal progress, the loan terms may require additional steps beyond what Greece has already announced. Perceptions in Greece and the lender countries as to whether the terms are too strict or not strict enough will determine the speed and likelihood of a loan being completed prior to refinancing dates in April/May.
  2. Budget cuts and debt roll over: Probability of 20% and a more severe solution: Greece implements proposed fiscal austerity measures, including cuts in spending, a freeze in hiring and wages, and greater effort at fighting tax evasion. Investors view these measures as credible, allowing Greece to successfully roll-over debt and avoid near-term liquidity problems. But the fiscal measures lead to a severe recession, allowing longer-term solvency concerns to remain.
  3. IMF Package: (Probability 5%): An IMF loan is possible, but very unlikely because it would mean that the ECB and EU are relinquishing control of the situation, thereby creating a major credibility problem. A common feature of IMF-led bailouts—currency devaluation—is not an option for Greece.
  4. Default: (Probability 5%):  Greece is unable to roll-over its debt in April/May and a bailout is not structured in time because either Greece fails to take the necessary actions or political support within the EU for a bailout is not there.

Morgan Stanley lays out different scenarios between a base case and a sovereign bear case.

Noteworthy:

  1. Equities to underperform in H1FY10 as it gets buffetted by a wave of macro shocks.
  2. EUR/USD to fall to 1.24. Now that is a big one.

Developments to track Greek public support for fiscal austerity measures is necessary for serious reforms. A strike planned for February 24th (by Greece’s main umbrella union) will be a gauge for sentiment towards announced plans. Greek government will release a draft bill of its tax plan this week. A vote could take place as early as end of February. Greece debt management office has indicated that it will come to market with a 10-year debt auction in late February (possibly the 22nd)—the auction is very important for sentiment and its subscription and financing rate will be closely scrutinized. A bailout is highly controversial in Germany and likely to be a main issue in key German regional elections for parliament if it’s viewed as not being tough enough. A loss by the ruling CDU/CSU/FDP coalition would put Merkel’s majority at risk.

Source: BIS, MS, GS Research

Source: http://investingcontrarian.com/global/soverign-debt-way-forward-if-any/

Vishal Damor
http://investingcontrarian.com/

Vishal Damor, works for an emerging market financial consulting firm and is the editor at INVESTING CONTRARIAN, a financial analysis and reporting site covering commodities, emerging markets and currencies.

© 2010 Copyright Vishal Damor - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules