28 Apr 2015
Three possible Greece debt deal scenarios – JP Morgan
FXStreet (Barcelona) - John Normand, Head of FX, Commodities & Int’l Rates Research at JP Morgan, shares the three key scenarios possible in the Greece debt deal and the possible impact on euro and rates.
Key Quotes
“There are three scenarios: (1) resolution in Q2 until the next rollover hump in coming years; (2) intensification through Q2 then resolution in Q3 or Q4; and (3) intensification with a path towards EMU exit.”
“The first path is our base case for the reasons stated earlier – the troika is willing to concede on the primary surplus and provide funding in exchange for progress on structural issues, but Greece’s rollover profile in coming years preserves high odds of recurring funding stress over the long term.”
“But if Greece goes quiet for the rest of 2015, we doubt the euro rises more than two to three cents to about 1.10, for a couple of reasons: the ECB balance sheet growth that has contained market stress will not reverse if Greece stabilises; and there is little evidence from the price patterns in table 1 that accounts are hedging Greek risk through the currency.”
“The second scenario envisions no resolution this quarter and thus a default on official sector obligations to the IMF, deposit flight from the Greek banking sector, a cap on the ECB’s ELA facility, a liquidity crunch and capital controls.”
“Since the second scenario is basically the status quo with an ELA limit, capital controls and slightly higher odds of EMU exit, sovereign spreads broadly would widen about 50bp and the euro would fall to the low end of the March/April range. But with the ECB still deploying its balance sheet, it remains tough to see this outcome delivering systemic spillovers on more than an intra-week or intra-month basis.”
“The third scenario is the most adverse and would arise if the Greek government responded to an ELA limit and capital controls with policies generally read as precursors to EMU exit. These moves could include issuing IOUs declared as legal tender, or perhaps imposing a nationwide bank holiday.”
“The euro would fall perhaps as much as 10 cents intra-month (so equivalent to its usual drops during existential crises), not because investors and corporate have material Greek exposure to liquidated or hedge, but because they will ask who is the next Greece or the next Syriza”
Key Quotes
“There are three scenarios: (1) resolution in Q2 until the next rollover hump in coming years; (2) intensification through Q2 then resolution in Q3 or Q4; and (3) intensification with a path towards EMU exit.”
“The first path is our base case for the reasons stated earlier – the troika is willing to concede on the primary surplus and provide funding in exchange for progress on structural issues, but Greece’s rollover profile in coming years preserves high odds of recurring funding stress over the long term.”
“But if Greece goes quiet for the rest of 2015, we doubt the euro rises more than two to three cents to about 1.10, for a couple of reasons: the ECB balance sheet growth that has contained market stress will not reverse if Greece stabilises; and there is little evidence from the price patterns in table 1 that accounts are hedging Greek risk through the currency.”
“The second scenario envisions no resolution this quarter and thus a default on official sector obligations to the IMF, deposit flight from the Greek banking sector, a cap on the ECB’s ELA facility, a liquidity crunch and capital controls.”
“Since the second scenario is basically the status quo with an ELA limit, capital controls and slightly higher odds of EMU exit, sovereign spreads broadly would widen about 50bp and the euro would fall to the low end of the March/April range. But with the ECB still deploying its balance sheet, it remains tough to see this outcome delivering systemic spillovers on more than an intra-week or intra-month basis.”
“The third scenario is the most adverse and would arise if the Greek government responded to an ELA limit and capital controls with policies generally read as precursors to EMU exit. These moves could include issuing IOUs declared as legal tender, or perhaps imposing a nationwide bank holiday.”
“The euro would fall perhaps as much as 10 cents intra-month (so equivalent to its usual drops during existential crises), not because investors and corporate have material Greek exposure to liquidated or hedge, but because they will ask who is the next Greece or the next Syriza”