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FINANCIAL NEWS
Thursday, 31 May 2012 - 10:20
What the biggest banks recommendate if Greece leaves euro
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, according to CNBC:
Nomura
-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 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
-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 [cnbc explains] 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
-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 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
-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
-A reintroduction of the drachma could see the euro fall to $1.10 due to capital flight out of the region (May 18).
"There would be significant further downside on equities and credit if a chaotic Greek exit were to unfold, likely double digit in the case of equities."