On Friday, courtesy of Bloomberg [16], we showed a very detailed Greek repayment schedule which laid out just how difficult the next few months will be for the bankrupt, in the words of its finance minister, country.
[17]
Below is a far simpler calendar this time courtesy of Goldman, which nonetheless captures vividly why Goldman thinks that "the ride over the next several weeks is likely to be bumpy."
[18]
Some more details on how Goldman, which as a reminder aided and abetted the Greek entry into the Eurozone by masking its unacceptably large budget deficit as well as its non-compliant debt/GDP ratio over a decade ago and whose former partner now is in charge of the ECB and is threatening with causing a terminal bank run in Greece any day now, sees the Greek calendar over the next three months, and why for Greece, now July 20 is the "hard deadline.
We believe negotiations could drag on likely through May and possibly into June. A ‘hard’ deadline could be July 20, when Greece faces a payment of €3.6 bn to the ECB, for which, we think, the country will not have sufficient cash. Exhibit 5 shows the timeline of cash disbursements Greece faces until August and the scheduled meetings of European policymakers. Peripheral spread volatility is likely to increase as time goes by, as investors will associate a higher probability of default to a higher probability of Grexit, although this association will depend on what conditions have led to the credit event.
We believe that peripheral markets would sell-off as the July 20 deadline approaches but, as long as the dialogue is still ongoing, spreads between Italy and Spain versus Germany are unlikely to widen more than to around 200-250bp. The tightening trend would resume upon Greece and its creditors finding a solution on the pace of reforms, how to fill the new funding gap and, eventually, also how to reduce the debt stock.
As a follow up, Goldman asks "where do peripheral bonds trade in the case of a Grexit." Here is its answer.
If Greece defaults on the official sector and negotiations were to break down leading to Grexit, instead, we would view this as a systemic event for markets. On its occurrence, we believe peripheral bond yields spreads to ‘core’ would widen significantly. Yield curves would steepen due to the possibility that an activation of OMT would skew the ECB bonds’ purchases toward short-dated maturities. The length and size of the sell-off would depend on how long it would take for policymakers to respond to the shock.
Respond to the shock? As in threaten to buy even more bonds which the ECB can't procure, and cause a terminal liquidity crisis across the entire fixed income market? We thought the launch of Q€ was precisely the pre-emptive response to the "shock"- or is Goldman hinting that the ECB's monetization of debt will be insufficient to keep Europe in a state of orderly insolvency? Of course, the ECB can always threaten to buy even more debt, although at this point not even tenured economists believe that this leads to any economic improvements.
During the Euro-area sovereign crisis, the spread between 10-year Bonos-Bunds and BTPs-Bunds peaked at 470bp and 512bp, respectively. This time around, the Euro area is better equipped to react to a large negative shock via the ESM and OMT and the ECB QE should provide a first line of defense. Also, in the periphery, a larger share of sovereign debt is now held by domestics, which should reduce the probability of a very sharp sell-off. Finally, economic activity is picking up and, after the fall-out post Greece’s debt restructuring in 2012, policymakers should be more aware of the negative consequences that a ‘credit crunch’ would have on the real economy, speeding-up their policy response. All this said, we think that, at the 10-year tenor, the spread between Spanish and Italian bonds yield versus Bunds yield could still widen to around 350-400bp before a policy response is enacted. We stress that the departure of a country from the ‘irrevocable’ monetary arrangements of the EMU would take us into unchartered waters and it is difficult to predict how negative the market reaction could be.
Needless to say if anyone knows whether Greece is "in" or "out", it's Goldman. Oh, and by now we hope it is all too clear which outcome Goldman and its banking peers would prefer: the one where the ECB doesn't do more monetization of risk assets, or the one where it does...
