GIORNALE3

Viewpoint: The Eurogroup’s negotiation strategy with regards to Greece has become markedly intransigent

As Greece has no viable alternative, the price to be paid will be mostly political….. …..


For professional investors and advisers only


Improved access to the market for Italy and Spain induced the Eurogroup to adopt a more intransigent stance in talks with Greece. The stiffening of the negotiation strategy, explicitly called for by Germany, Holland, and Finland, was also prompted by the decision taken by Greece’s main political parties to schedule an early general election in April, when the second economic consolidation plan is also due to kick off. Last Wednesday’s Eurogroup meeting was called off, an replaced with a conference call, and Greece has had to submit letters committing to implement the plan, signed by the leaders of the two main political parties, and defining coverage of the 325M shortfall, as requested by official creditors. The budget correction bill should be brought before Parliament today or tomorrow, and be voted on Sunday. The main bill had already been approved by Parliament with a wide majority of votes on Sunday, 12 February.

It will then rest on the Eurogroup, due to meet on 20 February, to decide what action to take. A lack of confidence in Greece may result in the adoption of assistance mechanisms that allow the country very limited operating independence. According to the FT, the new plan could include an escrow account with the priority function of covering debt reaching maturity over the following 9-12 months; any shortfalls would be covered by reducing the funds destined to covering the deficit resulting from the functioning of the public administration, forcing the Greek government to intervene immediately with its own corrective measures. The stable presence of an observer on behalf of official creditors could also apparently be imposed. A problem still awaiting a solution would be that of the financial gap to be closed in order to achieve a 120% debt/GDP ratio in 2020, estimated by some sources at 6 billion euros, without reviewing the total amount of the programme, announce at 130 billion euros. A swap involving Greek bonds held by the Eurosystem as a consequence of the SMP seems to be under way: the action will allow the ECB to escape the consequences of retroactive CACs being imposed on bondholders, but may also allow a faster reduction in the level of public debt in the future, if the ECB is willing to forgo the profits that will result in case of full repayment.

The whole issue is compromising relations between Greece and several creditor countries, creating tensions within the European Union. At present, however, Greece seems to have no bargaining power at all to question the conditions imposed. The crucial point is that the possible threat of the country not acknowledging its debts is not credible. While it is true that official creditors are already exposed by 73 billion euros, on top of the bonds held by the Eurosystem, it is also true that the protection mechanisms are still imperfect and, despite the greater willingness of investors to make distinctions among countries, the existing mechanisms cannot entirely rule out contagion risks. However, the balance of costs and benefits for Greece would be simply disastrous in the event of a default and a return to full monetary sovereignty. Greece’s exports are worth half its imports, and lacking substantial, regular inflows of foreign capitals, it would find it impossible to guarantee payments in foreign currencies (including, at that point, also the euro). As Greek economic agents would probably not have access to the capital markets, initially the rebalancing would take place mostly through a crash in imports: the consequences on economic activity would therefore be much more severe than those of the austerity plan required by the economic consolidation programme.


Appendix

Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology

Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports

Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld – Intesa Sanpaolo – Research Department