SEb's analysts see a large and credible IMF package as the most likely scenario to resolve the Greek debt issue. This is also what is needed to calm markets. Recent comments from EU officials also rules out debt restructuring for Greece. According to SEB's experts a proposal must be presented within coming days to calm financial and political nervousness.

1. Trading Strategy
Economic Research
The Greek drama
Outlook and market implications
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2. Main scenario: IMF leads enlarged rescue
package for Greece
IMF can act more quickly than EMU-16 and is not restricted by domestic
policies
IMF has large financial resources, currently in the neighbourhood of some
USD +500bn and they can be increased further by commitments also from
non-EU countries (e.g. China, Japan). The money will be paid out in
tranches over a long period and conditioned on adherence to the agreed
consolidation programme.
Previous IMF led packages have amounted to between 20% and 40% of
GDP (e.g. Latvia, Hungary, Iceland). The Greek package will likely be
considerably larger. Current speculations range between a sizeable
increase to EUR 150bn (amounts to roughly 60% of GDP) and a more
modest increase by EUR 10bn.
We see a large and credible IMF package as the most likely scenario. This
is also what is needed to calm markets. Recent comments from EU
officials also rules out debt restructuring for Greece. A proposal must be
presented within coming days to calm financial and political nervousness.
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3. Greek credit downgrade to junk
Facts and outlook
Greece S&P downgraded three notches to BB+ (from BBB+)
non-investment grade. Fitch and Moody’s retain investment
grade rating with Moody’s still highest at A3 (equal to S&P A-)
on review for further possible downgrade.
Portugal S&P downgraded two notches to A- (from A+).
ECB collateral rules state at least one official rating has to be
investment grade for lending from the ECB.
Trichet has stressed on several occasions that we will not see a
default in Greece. Our interpretation is that the ECB will find a
way to solve the problem, should ratings fall below the
threshold.
However, Greek banks should always have access to the short-
term funding (lender of last resort) provided that they are
deemed solvent.
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4. Market implications of a new IMF package
Short-term effects
USD, CHF have been the obvious safe haven currencies and
would weaken somewhat on new IMF rescue package
More muted reactions for SEK and NOK assets - upside
pressure on Swedish bond yields
German interest rates will rise - relief rally for PIIGS debt,
especially shorter maturities (2Y)
Stock market may recover, but declines have so far been fairly
limited
Macro - longer term
Double-dip risk has increased
Policy stimulus will remain in place for a longer period
Large divergence in European growth, downside risk for EMU
growth
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5. What could happen if Greece defaults?
A default does not necessarily mean that Greece is forced to leave the
EMU but it may still opt to do so:
1. If Greece defaults on its debt, the cost of leaving the euro at the
same time is small. Greece can get an economic boost from a
currency devaluation when switching back to the drachma without
worrying about the increased cost of servicing its EUR debt (on
which it has already defaulted).
2. The pressure on the other PIIGS countries will increase
dramatically if Greece defaults and even more if it leaves the euro.
Concerns will increase about these countries' ability to acquire
funding in the market. Why should the other PIIGS get help from
the EU/IMF when Greece didn’t. Portugal will be the second
country cut off from private funding followed by Spain and Ireland,
possibly Italy as well.
3. If one country leaves the euro, the whole project risks crumbling.
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6. Large exposure to PIIGS for core EMU
banks
While German, French banks have a
Consolidated foreign claims of reporting banks, bn EUR
large exposure to Greece (including
Claims vis-à-vis Ger Fra Gre Ire Ita Port Spa
Greece 45 79 … 9 7 10 1
French direct ownership of Greek
Ireland 184 52 1 … 17 9 15 banks) it is a small share of their total
Italy 190 508 1 46 … 5 47 foreign claims (1.5%-2% of foreign
Portugal 47 45 0 5 7 … 85 claims).
Spain 238 211 0 32 31 29 …
Total 704 895 2 91 62 53 148
Main risk is contagion to other PIIGS.
Source: BIS, Dec 2009, ultimate risk basis PIIGS amount to around 20-25% of total
foreign claims for German and French
banks (16 and 10% resp. excl. Italy).
PIIGS share of Euro-zone GDP, %
Also, large inter-linkage between PIIGS
with for example considerable exposure
2008
to Portugal in Spanish banks.
Portugal 1.8
Spain 11.8
Greece 2.6
Italy 16.9
Ireland 2.0
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7. PIGS 2010-11 Debt maturities
Portugal
• May 20, 2010 - EUR 5.6bn Italy
• July 23, 2010 - EUR 4.5bn • Q2 2010 - EUR 80bn
• Sep 17, 2010 - EUR 2.7bn • Q3 2010 - EUR 102bn
• Nov 19, 2011 - EUR 2.6bn • Q4 2010 - EUR 72bn
• Jan 21, 2011 - EUR 2.1bn • Q1 2011 - EUR 73bn
• Feb 18, 2011 - EUR 1.8bn • Q2 2011 - EUR 35bn
• Mar 18, 2011 - EUR 2.0bn • Q3 2011 – EUR 71bn
• Apr 15, 2011 – EUR 4.7bn • Q4 2011 – EUR 16bn
• Jun 15, 2011 – EUR 5.0bn
Spain
Greece • Q2 2010 - EUR 21bn
• May 19, 2010 - EUR 8.5bn
• Q3 2010 - EUR 40bn
• July 23, 2010 - EUR 2.4bn
• Q4 2010 - EUR 18bn
• Oct 15, 2010 - EUR 1.3bn
• Q1 2011 - EUR 19bn
• Mar 20, 2011 - EUR 8.8bn
• Q2 2011 - EUR 26bn
• May 18, 2011 - EUR 6.5bn
• Q3 2011 – EUR 21bn
• Aug 20, 2011 – EUR 6.0bn
• Q4 2011 – EUR 21bn
• Dec 29, 2011 – EUR 4.6bn Source: Bloomberg
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8. The risks for other PIIGS - Focus on
Portugal and Spain
Portugal is likely to need financial support, probably of the same size
as for Greece
For the other PIIGS, the picture is somewhat more mixed
– Spain has a large budget deficit and the banking sector is heavily
exposed to the troubled housing/construction markets. On the other
hand, Spanish households have a high saving ratio and reasonable
low indebtedness. Moreover, Spain has experienced quite
substantial improvements in the current account.
Portugal Bond maturities (EUR, bn) Spain Bond maturities (EUR, bn)
90 84 90
20 20
18 77
18 18 80 80
16
16 16 70 70
14 61
14 14 60 60
52
12 12 50 47 50
10
10 9 8 10 40 40
8
8 7 8 30 29
6 6 30 25 30
6 6 17
20 16 20
4 4
2 2 10 10
0 0 0 0
10 11 012 13 14 015 16 17 018 19 10 11 12 13 14 15 16 17 18 19
20 20 2 20 20 2 20 20 2 20 20 20 20 20 20 20 20 20 20 20
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9. Government finances
High debt levels for Greece and Italy, other PIIGS not that far
from Euro-zone average
Large budget deficits in Greece and Ireland. Spain and Portugal
slightly higher than Euro-zone average. Less of a problem in
Italy
Government deficit,% of GDP
5.0 5.0
2.5 2.5
0.0 0.0
-2.5 -2.5
-5.0 -5.0
-7.5 -7.5
-10.0 -10.0
-12.5 -12.5
-15.0 -15.0
02 03 04 05 06 07 08 09 10 11
Greece Spain Ireland
Italy Portugal
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10. The root of the PIIGS countries problems
Greece has lost more
than 50% of its
competitiveness vs.
Germany since the
start of EMU
The other PIIGS are
almost as worse off
Internal devaluations
are needed to restore
competitiveness.
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11. Small export sectors in PIIGS
Correction of current account balance will have to come from
low domestic demand
Private consumption in Spain and Ireland has declined by 7-
8% in 2008-09, investments by more than 30%
Export, % of GDP
90 Belgium 90
Ireland
80 Netherland 80
70 Austria 70
Denmark
60 Sweden 60
Germany
50 Finland 50
40 Portugal 40
UK Italy France
30 Spain Greece 30
20 20
10 10
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12. Low Swedish exports to PIIGS
Goods export to PIIGS countries
% of total goods export
Ire. Gre, Spa. Ita. Por. PIIGS
Ireland - 0.4 4.2 3.5 0.5 8.6
Greece 0.4 - 2.9 11.5 0.7 15.5
Spain 0.5 1.4 - 8.1 9.1 19.0
Italy 0.4 2.1 6.5 - 1.0 10.0
Portugal 0.6 0.4 25.6 3.7 - 30.2
France 0.7 0.9 8.3 8.8 1.3 19.9
Sweden 0.5 0.5 2.3 3.1 0.5 7.0
UK 7.5 0.7 4.1 3.8 0.6 16.6
Germany 0.6 0.8 4.3 6.3 0.8 12.8
=
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13. Inverted yield curve as markets are
pricing a Greek default
When a default is becoming Greece/German rate spreads
priced by the market the market
is effectively pricing in a haircut 1750 1750
on the bonds
1500 1500
For an investor to still get his
money back (after a hair cut) 1250 1250
the shorter the maturity of the 1000 1000
bond the higher the interest rate
750 750
needs to be.
Thus the yield curve gets 500 500
inverted with the 2Y yield much 250 250
higher than the 10Y
0 0
If a sizable financial aid Jan Feb Mar Apr
package is delivered which 10
covers the Greek debt maturing 10Y CDS spread 10Y Gov spread
in the coming 2 years as well as 5Y CDS spread 2Y Gov spread
expected budget deficits until
2011 then the 2Y bonds should
strongly outperform
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14. Disclaimer
This report is produced by Skandinaviska Enskilda Banken AB
(publ) for institutional investors only. Information and opinions
contained within this document are given in good faith and are
based on sources believed to be reliable, we do not represent
that they are accurate or complete. No liability is accepted for
any direct or consequential loss resulting from reliance on this
document. Changes may be made to opinions or information
contained herein without notice.
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