With GGB prices, down 53% from post-PSI, plunging to all-time lows (offering Greywolf more opportunities to add to its 'no-brainer' trade) it appears Europe's ever-hopeful self-perpetuating banks are turning tail and realizing that the truth will set them free. In a turnabout from a late May note detailing 'why Greece will not leave the Euro', Credit Suisse now expects a return to some form of local currency for Greece within one year (an event they now assign a probability greater than 50%). The reason for their change of view is the slowness of structural reforms/privatizations and the lack of available capital to bail out the increasing number of distressed euro zone countries. It seems almost impossible for Greece to pull itself out of the contractionary hole it's in without additional support that few are politically able or willing to provide. Expecting another round of PSI - extending to ECB losses - and ending the ridiculous state of affairs that exists currently whereby the euro area is providing funding to Greece to enable them to repay the ECB. Ominously, they note, against the backdrop of the situation in Spain, we believe that such a development in Greece will have a highly negative impact on sentiment, further putting into question the sustainability of the euro area as a whole.
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Credit Suisse: Greece – the return of the drachma is becoming more likely
The probability that some form of local currency is reintroduced has increased in our view, and is now greater than 50% on a 1-year horizon. This doesn’t necessarily mean Greece imminently needs to leave the EU/euro area – the new currency and the euro could be run in parallel – although that too has become more likely in our view. In short the reason for our change in view is the slowness of structural reforms/privatizations and the lack of available capital to bail out the increasing number of distressed euro zone countries. It seems almost impossible for Greece to pull itself out of the contractionary hole it’s in without additional support that few are politically able or willing to provide.
One near-term solution that strikes us as particularly attractive would be for the ECB to restructure its Greek bond holdings – on a notional flat basis into debt of a similar maturity profile to that issued under PSI for private creditors. The issue of subordination would be immediately reduced, with the ECB viewed to have ultimately had to take similar losses (on a pv basis) as everyone else, and the (crazy) current situation whereby the euro area is providing funding to Greece to repay the ECB would go.
Rather than coming up with an additional €50bn bailout program (which is an estimate of ours should Greece get a two-year extension) the already agreed funding could be used to fund the slippage in the program, supporting Greece directly and giving the country a chance to get back on its feet following the lost months surrounding the debt exchange and dual elections.
While we believe that the reintroduction of a local Greek currency would be done in an orderly manner, against the backdrop of the situation in Spain, we continue to believe that such a development in Greece will have a highly negative impact on sentiment, further putting into question the sustainability of the euro area as a whole. We are of the view that the point can be reached whereby Greece is able to exit the euro area without prompting considerably wider stress, but we are not there yet – the necessary policy infrastructure is not in place, and the situation in the rest of the periphery is too fragile.