With mere hours left until the first Greek exit polls are released, one group of the Greek population, perhaps the most important one if the country of 23% unemployment is to have any hope of not sinking into the Mediterranean, its business executives, has yet to express its opinion on the aftermath of today's election. And while we know that many local businesses have already transferred their money (whether or not taxed is a different question) abroad, it is after all they that will serve as the backbone of any possible future Greek renaissance, whether EUR or XGD [8] denominated. So do they think? Recently Citigroup's European team met with executives from big Greek / Cyprus banks and several officials - independent parties. The key message is that the situation is critical but there is some optimism on the Day after the elections.
From Citi:
The base case scenario for most of the executives we meet seems to be a New Democracy led government. That said most accept that the final election result is unpredictable with official and unofficial opinion polls showing only a 1-2% small ND lead. The people we met are, unsurprisingly, more concerned on the Day after any Syriza win, but also believe that Syriza will not seek a full confrontation with the Troika leading to a Grexit.
There is hope for a more flexible implementation timetable by Troika for the additional €12bn austerity measures that are due by the end of June. Also, there is hope that the second review of the implementation of Program will be completed after the elections if a government is formed, in time to allow the c€31bn funding to be disbursed. Grexit is still not the base case scenario for the executives we met.
In summary:
Key Negatives:
- Critical state of funding: The funding needs for the Greek state in 3Q is at €32bn - of which €31bn should come from the second assessment of the Memorandum. The latter has yet to start and the timetable is very tight for a completion of the assessment by the end of June for a 3Q disbursement. Most expect / hope for some leeway from Troika on this (but see little leeway on the structural reforms).
- There is a wide concern that the rise of radical / anti memorandum parties in opposition could be a disruptive force in any attempt by a centre right government to stick to a Fiscal Consolidation / Reforms Program.
- Greece needs a robust government and there is little belief by the executives that Greece will get one from this round of elections - especially given that the lead of New Democracy over Syriza is within the 1-2% margin of error. The sustainability / longevity of the government after this round of elections could be another issue.
- Little progress has been made on many reforms that would have allowed not a lowering of labour costs but a more flexible pricing regime as well. There was a belief that structural reforms should have taken place ahead of austerity. Less than a third of the laws / reforms voted in 2010 were fully effected in 2011/12.
- On discussing Grexit most agree that the exchange rate as a tool wouldn’t restore Greece's competitiveness but would create high levels of inflation.
- Asset quality continues to deteriorate in Greece among the banks. Also, while the momentum in deposit outflows seems to have stopped accelerating (as it did post May 6 elections) it remains significantly negative.
Key Positives:
- A New Democracy win and them being able to form some type of coalition government is the base case scenario for most. All executives agree that Greece can not afford to go to a third round of elections (a government will be formed one way or another) – a view they believe is shared by the politicians.
- The government can tap the liquidity in the HFSF (around €3bn) subject to an approval by the Troika. It can also issue T-bills (presumably to Greek banks?) - These could provide a buffer before the Second review of Troika and/or negotiations with Troika over the Memorandum are completed.
- Significant progress in pension and most recently (Feb) labour market reforms that should help restore a lot of Greece's lost competitiveness in the last decade. Some cited that private sector wages could even be down up to 30-40% this year. While the recession makes this less visible, the reform is there.
- Most believe that in the event that Syriza wins and / or forms a coalition government it will not seek an immediate full confrontation with the Troika but perhaps seek to renegotiate with them first before nullifying the Memorandum.
- It could be feasible for Troika to offer an extended timetable to Greece for the implementation of the additional €12bn of measures because of a clause in the Memorandum that allows it if Greece is in recession again in 2013.
Sadly, while there is some muted optimism on the ground, Citi is far more pessmistic, regardless of the outcome of today's vote.
Even if ND led coalition government is inaugurated in time and agrees in principle to the conditions, the Troika cannot afford agreeing on a big amendment of the program immediately thereafter in our view. Any stretched timeline of implementation, may be positive, but Greece would still need to fix the deficit from the poor implementation in the last two months, and eventually still find €12bn of measures (at c7% of GDP). In that respect we continue to expect a much higher probability (50% to 75%) of Grexit in the next year or two. If elections result in a Syriza led government, we believe the break is likely to happen sooner.
With the large dependency of the banks in respect to ECB funding, delays in the provision of the required extra capital to the banks probably would lead to limitations of Bank’s access to Eurosystem funding maybe including ELA. Even if Greece stays in the Euro area the non-implemented restructuring of public sector enterprises is likely to create additional short term pressure on the economy, as it is likely to lead to a significant increase of unemployment and we doubt that the recently implemented pension an labour market reform will be able to have a meaningful impact to propel economic growth in the medium term.
Also, remember: anything but a decisive Syriza victory takes the chance of a global central-planner bazooka off the table, at least immediately, perhaps the sole threat that forced a major short squeeze in the last two days of trading in the past week as JPM already pointed out. It also puts the Deutsche Bank "market crash for ECB intervention [9]" scenario in play.
In this Constanza market, will the "conventionally accepted best" outcome once again be the worst one?