What Investors Can Expect If
Greece Leaves Euro Zone
Reuters
| May 30, 2012 | 02:26 PM EDT
European
policymakers are publicly discussing the risk of Greece leaving the euro, triggering
a flurry of bank research notes on what investors might want to buy or sell if
this were to occur.
These
are trading recommendations made by some of the world's biggest banks:
Nomura [ NMR 3.27
-0.05 (-1.51%) ]
A
Greek euro exit "looks probable rather than possible" after the June
17 elections given current political trends, with a "subjective
probability" that is marginally above 50 percent (May 29 research note).
German
bond yields could move into negative territory for maturities of up to five
years if the market were to price in an imminent euro break up and the 10-year
Bund yield would fall far below 1 percent (May 29).
If
Greece
leaves the euro zone after the elections, the euro [EURJPY= 97.74 -0.03 (-0.03%)] will slide to $1.15 and 90
yen in the second half of 2012. The dollar and the yen are expected to benefit
from severe market tensions. The SNB's Swiss franc ceiling of 1.20 per euro is
seen as "100 percent credible" even if Greece exits (May 17).
Citigroup [
C 26.00 -1.02
(-3.78%) ]
Chances
of Greek exit estimated at 50-75 percent (May 23).
Sees
Greek exit as manageable but requiring aggressive action to stop contagion
(e.g. more cheap three-year ECB loans, rate cuts, a relaxation of austerity
requirements, pan-euro zone deposit guarantees, pan-euro zone funded bank
recaps, new bailout packages, more ECB bond buying, enlarged bailout funds).
U.S.
dollar investors who expect further weakness should look to Japanese defensives
(healthcare, telecoms, consumer staples, utilities).
Credit
Agricole and Banco Popular expected to "underperform" during
contagion.
Investors
might worry about U.S cyclicals (e.g. materials, autos, consumer durables,
capital goods) which generate more than 15 percent of revenues from Europe. Traditional defensives with exposure to Europe (e.g. food, beverage and tobacco, pharmaceuticals
and biotechnology, household and personal products) may not prove to be that
defensive.
Morgan
Stanley [ MS 13.09 -0.55
(-4.03%) ]
Euro
zone break-up not base case scenario but probability raised to 35 percent from
25 percent. Timescale for this event cut to 12-18 months from five years.
Countries most at risk of contagion are Italy,
Spain, Portugal and Ireland (May 24).
If
Greece
left the euro, there would be a 40 percent chance of strong contagion and a
strong policy response. Such a scenario would see Euribor-OIS initially widen
past 100 basis points and then tighten to 30 bps on a strong policy response.
The euro would drop sharply, falling below $1.10 and staying below this level
"for years." Equities would fall 20 percent. A strong policy response
and steps towards banking and fiscal union would provide scope for a rebound in
financials and peripheral country equities.
If
a larger peripheral country or group of countries left the euro, Bund yields
would converge with JGB yields. Euribor-OIS spreads would widen due to bank
losses. The dollar would gain broadly. The euro/Swiss franc exchange rate would
likely move to parity as the SNB would not be able to defend the floor.
Equities would risk losses of 35 percent and short positions would be
recommended in the periphery, financials and cyclicals.
Morgan
Stanley said if a large core country or a core group of countries were to
leave, those left sharing the euro would see wide bond yield spreads versus Germany. The
Libor-OIS in departing countries would initially. widen. The euro would fall to $0.80.
Long
positions would be recommended in non-euro zone stocks and cheap domestic or
defensive firms in the core.
Societe
Generale
An
"orderly" Greek departure could see the Euro STOXX 50 .STOXX50E fall
up to 10 percent (May 25).
A
"disorderly" break-up could see euro zone corporate profits decline
for two years, lead to a rise in bond yields that would be partly offset by
recession fears and a rise in the equity risk premium. The Euro STOXX 50 could
drop by "close to 50 percent."
Goldman Sachs GS
If
Greece unilaterally quit the euro zone and reintroduced the drachma, euro zone
GDP could be reduced by up to 2 percentage points, even if
"substantial" counter-measures were taken by policymakers (May 28).
Earnings
expectations would be hit and the STOXX Europe 600 could fall to 225. The
equity risk premium would rise from its current 8.7 percent, pushing the index
back to "at least the 215 low of last September or more" while
10-year bond yields could fall to as low as 1.5 percent and 1 percent in the United States and Germany, respectively.
"A
temporary overshoot of these (bond yield) levels is likely. Sovereign spreads,
particularly at the front end of yield curves, could become a more explicit
policy target."
Under
the worst-case scenario, which envisages a full-blown bank run in Greece that
triggers widespread disruption elsewhere, the STOXX Europe could revisit the
2009 low of 158.
JPMorgan [ JPM 32.96
-0.67 (-1.99%) ]
A
reintroduction of the drachma could see the euro fall to $1.10 due to capital
flight out of the region (May 18).
