Greek referendum scenarios and implicationsGreek referendum scenarios and implications

Pernille Bomholdt Henneberg Anders Vestergård Fischer Anders Møller LumholtzSenior Analyst, Euro macro research Senior Analyst, FI research Chief Analyst, FI research

3 July 2015

+45 30 51 53 75 +45 45 14 69 96 +45 45 14 69 98perni@uk.danskebank.com afis@danskebank.dk andjrg@danskebank.dk

Investment Research

www.danskebank.com/CI Important disclosures and certifications are contained from page 27 of this report.

Main scenario: Going to plan B � but how does it look?

• Tsipras�s call for a referendum on the Institutions� proposals has changed the Greek game Tsipras s call for a referendum on the Institutions proposals has changed the Greek game, and we have now moved from �plan A� to �plan B� � but the problem is there was no �plan B�.

• The development is very uncertain and the risk of a �Grexit� has never been bigger, but there is still time and some way to go before this event materialisesthere is still time and some way to go before this event materialises.

• In our view, we are on the �default but no Grexit� path, but it is hard to see this as sustain-able given the negative environment between the Greek government and the creditors.

• The situation of the Greek public has deteriorated with the closure of the Greek banks and the elevated uncertainty over Greece�s future.

• The latest referendum polls show a small majority for accepting the present �deal� and a large majority of the Greek population still wants Greece to stay in the euro area.

• We expect the Greek population to vote �Yes� on Sunday, but Tsipras�s aggressive campaign for a �No� vote makes it a close call.

• If the Greek population votes �Yes�, a new Greek bailout programme is much more likely, but the political uncertainty will probably remain for some time.

• In case of a �No� vote, the path towards a Grexit goes through a halt of the ECB�s ELA

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In case of a No vote, the path towards a Grexit goes through a halt of the ECB s ELA funding. The trigger of a broad Greek default will be no payment to the ECB 20 July.

Current situation of �default but no Grexit� is unsustainable

Current situation End-path?

A new deal is reached Programme extended Defaults but no Grexit Grexit

End-path?

? ?

• Chicken game until the last minute

• Tsipras fights to the very end

• Greece maintains tough stance

• Creditors do not want Grexit

• Greece defaults on IMF payment

• The ECB removes the ELA

f f

• Greece defaults on IMF payment

• ECB caps ELA to Greece

• Greece cannot pay state wages

A deal will be reached as the Greek

Tsipras fights to the very end

• Decision is taken at highest level• Capital controls (Freezing of bank deposits) are possible

Creditors extend the current bailout

• Capital controls (freezing of deposits and restrictions of external payments)

Greece leaves the euro and the �New

• Capital controls (freezing of deposits,restrictions of external payments)

Greece defaults but is allowed to stay A deal will be reached as the Greek leaders will blink eventually

Creditors give some concessions. A third bailout package is agreed.

Creditors extend the current bailout programme beyond June

Greece leaves the euro and the New Drachma� is introduced

The current government collapses, snap election and a new government

is formed

The can is kicked down the road as harsh negotiations end in deadlock.

Greece defaults but is allowed to stay in the euro

Political crisis with referendum, snap election or new government

is formed

A new election may be called, Debt relief is still needed

ECB summer repayments big hurdle. If the ECB removes the Greek ELA

funding, Grexit is very likely.

A new election may be called, Debt relief is still needed

Euro leaders respond strongly and issue a statement to mitigate

contagion. The ECB commit to �do whatever it takes�

3www.danskebank.com/CI

Source: Danske Bank Markets

What to look for ahead of the Greek referendum?

The Greek government recommends a �No� vote, but gaccording to Tsipras: �In any case, the Greek government remains on the table and will be there on Monday� Institutions: �No means Greece is saying No to Europe�

4www.danskebank.com/CI

Source: GPO, Danske Bank Markets

Referendum polls have turned from �Yes� to �No� to �Yes�

Definitely Yes Rather Yes Rather No Definitely NoHow would you vote in the Sunday referendum? 43.3 3.8 3.9 39.3Do you believe that Greece should remain in the euro zone no matter the sacrifices? 59.9 14.3 5.1 19.8

Polls on Greek referendum, (%)Polls conducted after banks have been closed

Source: GPO

Yes NoVote on Sunday's referendum (poll conducted after capital control was announced) 37 46Vote on Sunday's referendum (poll conducted before capital control was announced) 30 57Source: ProRata

Polls conducted after referundum was called but before banks were closed

Source: ProRata

Yes NoWants agreement 57 29Source: Alco Poll (24-26 June)

Yes No Not decided Blank/No answer

14Not decided/Blank

Polls conducted prior to referendum was called

Vote to agreement 47.2 33.0 18.4 1.4Source: Kappa Research for To Vima

In your opinion will there be an agreement in the end?

Would you personally like an agreement?

Yes No

58.2

76.8

18.6

18.7

If you were to choose between the creditor proposal and grexit, what would you choose?

Source: http://.protothema.gr/ (10-12 June)

Proposal

49.7

Grexit

27.2

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STEPS TOWARDS A GREXIT

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Is the political path towards a Grexit or a new programme?

Anti-programme t

Snap elections

Unity government -third party leader

New government

government

Pro-programme government

Referendum on Institutions� proposal (government

Creditors reject

Greece votes � YES�

Tsipras steps down

Technocrat government

negotiates with Institutions

p p (grecommends �NO� vote)

Tsipras remains PM

Creditors accept

Creditors reject

Greece votes �NO�

Tripras tries to nego-tiate with Institutions

s p as e a s

Tsipras remains PM Creditors accept

Creditors reject

No new programme

New programme

Referendum cancelled

Tripras tries to negotiate with Institutions

Creditors accept

Creditors reject

Grexit very likely

ECB removes ELA cap

Deposit withdrawal limits d ll d

ECB halts ELA funding

Path towards new programme

Description (bold more likely)

7www.danskebank.com/CISource: Danske Bank Markets

Grexit very likelygradually removed Path towards Grexit

First steps towards a Grexit taken� but still some way to go

End-JuneGreece�s bailout extension expired � Greece without adjustment programme

14 July: Failure on Samurai bond20 July: Failure on ECB-held bond

Potential trigger of CDS

30 June

Greece did not repay debt to the IMF

28 July

Greek Central Bank introduces �New

Drachma�

The ECB capped ELA funding just below

EUR90bn

Tsipras called for referendum (Greek

parliament accepted)

26-27 June

Greek referendum on Institutions� proposals

5 July ?6 July � ?

Negotiations between Tsipras and

Institutions fail

?

Greek government runs out of money and issues IOU to

Greek government introduce bank

holidays and deposit

Drachma

Grexit is announced

EUR90bnparliament accepted) proposals

No new programme

IMF: �Greece is now in arrears and can

only receive IMF financing once the

NOYES

Institutions fail and issues IOU to pay state salaries

and pensions

withdrawal limits

ECB halts ELA funding and/or

increases haircuts on collateral

Eurogroup publishes joint statement

ECB commits to do �whatever it takes�

financing once the arrears are cleared�.

Banks are classified as insolvent and

official plans emerge to

recapitalise and possibly nationalise

8www.danskebank.com/CI

Source: Danske Bank Markets

p ythem

Triggers of a Grexit �what to look for?

Steps towards a GrexitSteps towards a Grexit

Negotiations between Greece and the Institutions end in deadlock √

Greece exits bailout programme as no deal can been reached √

The ECB caps ELA funding to the Greek banks √

T he Greek government introduces deposit withdrawal limits √

Greece misses payment to the IMF (comes under arrear) √p y ( ) √

The Greek population vote 'NO' at referendum ?

ECB bond (SMP holding) expires without payment from Greece ?

The ECB halts ELA funding and/or increases haircuts on collateral ?

The Greek government runs out of money ?

The Greek government issues IOU to pay state salaries and pensions ?

The Greek government introduces 'New Drachma' ?

Grexit is announced ?

9www.danskebank.com/CI

Source: Danske Bank Markets

Upcoming Greek payments

June IMF payments are bundled to end-of-month Expiry of ECB bond (SMP holdings) crucial deadline

9 EUR bn

IMF payments June 2 010 Jul 15

6

7

8

p y u* 05 Jun: EUR 0.30bn* 12 Jun: EUR 0.34bn* 16 Jun: EUR 0.57bn* 19 Jun: EUR 0.34bn

TOTAL: EUR 1.56bn (deadline 30 June)

0.5

0.1

2.010-Jul-15

13-Jul-15

14-Jul-15

Samurai bond of EUR85mn is first comming private debt payment

Widely viewed that 20 July (GGB payment

4

5

6

3.6

1.017-Jul-15

20-Jul-15

Widely viewed that 20 July (GGB payment in SMP portfolio) is the crucial deadline

1

2

3 1.0

1.4

07-Aug-15

14-Aug-15

0Jun Jul Aug Sep Oct Nov Dec

IMF loan Eurosystem bonds GGB coupons T-bill

3.4

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

20-Aug-15

IMF loan Eurosystem bonds JPY bond GGB coupon T-bill

10www.danskebank.com/CI

Source: IMF, Bloomberg, Danske Bank Markets

ECB�S BACKSTOP FACILITIES

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ECB�s backstop facilities

Aim Activated Scope Conditionalities Links

ECB's QE * Address the risks of a too prolonged period of low inflation

* Programme announced in January 2015 * Monthly purchases of EUR60bn (including ABSPP and CBPP3)

Press release

* Purchases initiated in March 2015

* Purchases are intended to be carried out until at least September 2016 (at least until there is a

* Current holdings EUR194bn out of EUR1140bn expected       at least September 2016 (at least until there is a 

sustained adjustment in inflation) * Flexibility about pace of purchases (Summer frontloading)

ECB's OMT * Defence the singleness of the monetary policy

* Programme announced in August 2012

* Purchases of sovereign bonds with a maturity of 1‐3 years

* Conditionalities attached to adjustment programme (direct programme or a precautionary credit line) Press 

release

* Purchases never activated* Countries issue along the yield curve, to a fairly broad category of investors and to certain Purchases never activated fairly broad category of investors, and to certain quantities

ECB's SMP* Ensure depth and liquidity in market segments which are dysfunctional

* Programme annunced in May 2010* Scope determined by the Governing Council

Press release

* Purchases initiated in May 2010

* Last purchases in February 2012  * Current holdings EUR134bn down from EUR220bn in February 2012* Programme terminated in September 2012

ESM's Secondary Market Support Facility

* Support the functioning of the government debt markets when the lack of liquidity threatens financial stability

* Established in July 2011

* Maximum lending capacity of EUR500bn

* Conditionalities attached to adjustment programme 

Guideline on SMSF

* Entered into force in September 2012

* Countries outside adjustment programme, but subject to financial market disruptions, in a sound economic and financial situation (conditions in MoU)

Easy to launch

Description

ECB's liquidity operations (TLTRO, MRO, USD facility)

* Steer short‐term interest rates and improve monetary transmission mechanism

* Regular liquidity‐providing transactions * Full allotment * Liquidity obtained against eligible assets Instru‐ments

12www.danskebank.com/CI

Difficult to launch

Source: ECB, Danske Bank Markets

The ECB�s QE programme could easily be scaled up

Details about the ECB's QE programme

Size of programmeAround EUR1140bn including ABS and covered bonds EUR836bn in sovereigns, agencies and institutions

Limit on purchasesPurchases will be open-ended ("will in any case be conducted until a sustained adjustment in the path of inflation" )

7070

80

90EUR bn

Summer front-loading (Danske exp. Jun-Aug)

Any shortcommings covered in Sep

sustained adjustment in the path of inflation )

Start of purchases Purchases initiated in March 2015

Pace of purchasesEUR60bn p/m including ABS and covered bonds EUR50bn p/m in sovereigns, agencies and institutions

Risk sharing 20% of potential financial risk will be shared within the Eurosystem

61 6063

53 53

60 60 60 60

50

60

70

Risk sharing 20% of potential financial risk will be shared within the Eurosystem

Seniority Bonds will be pari-passu to other investors

Distribution Buying according to ECB's capital key

P d tIG sovereigns, agencies and linkers (also negative yielding bonds but only

30

40

Productsg , g ( g y g y

down to the deposit rate)

Maturity Range between 2Y and 30Y

Sterilisation No sterilisation

11 12

0

10

20

Conditionality No conditionalities

Flexibility Purchases moderately frontloaded in May and June 2015

0Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

PSPP CBPP3 ABSPP

13www.danskebank.com/CI

Source: ECB, Danske Bank Markets

The OMT conditionalities could be changed � if needed

The European Court of Justice (ECJ) on 18 June concluded theOMT programme falls within the scope of the ECB�s mandate

The ECJ has allowed the ECB �broad discretion� when it �prepares

Details about the ECB's OMT programme

Size of programme Not specified

Limit on purchases No ex ante quantitative limits are set on the size The ECJ has allowed the ECB broad discretion when it preparesand implements an open market operations programme�.

Start of purchases Purchases have never been activated

Pace of purchases Not specified

Risk sharing Full risk sharing

ECB executive board member Benoit Cæuré, 29 June:

�The ECB clearly stated on Sunday that it was monitoring economicand market developments closely. Should risks arise, we are readyto use the instruments we have at our disposal � QE and the OMT

Risk sharing Full risk sharing

Seniority Bonds will be pari-passu to other investors

Distribution Buying in the country which has addressed a request

P d t S i ( d k t ) to use the instruments we have at our disposal QE and the OMTprogramme � and we are even ready to use new instruments withinour mandate�

�The ECJ has validated the OMT programme that was put in place in2012. It was the Court�s judgment that the ECB should be allowed

Products Sovereigns (secondary markets)

Maturity Range between 1Y and 3Y

Sterilisation Full sterilisation

broad discretion when choosing its instruments.Conditionality Adjustment programme conditionalities, in the market under own steam

Flexibility Not specified

14www.danskebank.com/CI

Source: ECB, Danske Bank Markets

ESM�s SMSF useful for countries without a programme

SMSF conditionality: �Access to a SMSF may be open to an ESMMember outside of a macro-economic adjustment programme, butsubject to financial market disruptions, as long as the Member'seconomic and financial situation remains sound and on the basis of aglobal assessment, conducted by the European Commission in liaisonwith the ECB of the following criteria:

Details about the ESM's Secondary Market Support Facility (SMSF)

Size of programme Not specified.

Limit on purchases Maximum capacity of ESM is EUR500bn in all aid facilities

(a) Respect of the commitments under the Stability and Growth Pact. An ESMMember under excessive deficit procedure may still access a SMSF, pro-vided it fully abides by the Council decisions and recommendations aimedat ensuring a smooth and accelerated correction of its excessive deficit.

(b) A sustainable general government debt.

with the ECB, of the following criteria:

Start of purchases Purchases initiated upon approval of request member state

Pace of purchasesNot specified (note that the PMSF is similar but can be used in primary market)

Risk sharing Full risk sharing among euro members (b) A sustainable general government debt.

(c) Respect of the commitments under the Excessive Imbalances Procedure(EIP). An ESM Member under EIP may still access a SMSF, provided it isestablished that the Member remains committed to and capable of ad-dressing the imbalances identified by the Council.

(d) A track record of access to international capital markets on reasonable

Risk sharing Full risk sharing among euro members

Seniority Not specified

Distribution Buying member states where request have been approved

P d t S i ( d k t )terms.

(e) A sustainable external position.

(f) The absence of financial institution solvency problems that would posesystemic threats to the stability of the euro area banking system or that ofits Member States.

Products Sovereigns (secondary markets)

Maturity Not specified

Sterilisation Bonds can be sold, held to maturity or used for repos

Several conditionalities incl possible 'financial market disruptions' and an (g) The beneficiary ESM Member shall ensure a continuous respect of the

eligibility criteria and adopt where appropriate corrective measures inconsultation with the European Commission and the ECB.

ConditionalitySeveral conditionalities incl. possible financial market disruptions and an MoU (wihch shall be completed within 2 business days)

Flexibility Programme has never been activated but has high implementation flexibility.

15www.danskebank.com/CI

Source: ESM FAQ and ESM: Guideline on the Secondary Market Support Facility

EXPOSURE TO GREECE

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Direct Greek exposure amounts to 3-4% of GDP

Greek debt transferred from private to public sector PSI on Greek debt in 2012 � is OSI next?

Greek Debt Composition, Ult. Mar 2015, EUR bn

Bonds and Notes 82Bonds and Notes 82

Bonds issued domestically 64

Bonds issued abroad 3

Securitization issued abroad 0

Short-term notes 15

Loans 231

Bank of Greece 4

Other domestic loans 0

Special purpose and bilateral loans 7

Fi i l S t M h i l (EFSF IMF d bil t l) 205Financial Support Mechanism loans (EFSF, IMF and bilateral) 205

- IMF 21

- EFSF 131

- Euro area governments 53

Other external loans 5

R 10Repos 10

Total 313

17www.danskebank.com/CI

Source: PDMA, Eurostat, Danske Bank Markets

Greek exposure has increased due to Target2 imbalances

Target2 loss distributed according to the ECB�s capital key Greece�s Target2 deficit rose with political uncertainty

Euro area govies EFSF ECB (SMP)

Intra eurosystem (Target2) Total % of GDP

Germany 14 38 7 29 88 3%Germany 14 38 7 29 88 3%

France 11 29 5 23 68 3%

Italy 10 25 5 20 60 4%

Spain 7 17 3 14 41 4%

Netherlad

3 0 2 7 11 2%

Belgium 2 0 1 4 7 2%

Greece 0 0 1 3 4 1%

Austria 2 0 1 3 5 3%

Portugal 1 0 1 3 5 3%

Finland 1 0 0 2 4 2%

Ireland 1 0 0 2 3 2%

T t l 53 131 27 115 326 3%Total 53 131 27 115 326 3%

18www.danskebank.com/CI

Source.: Bloomberg, ECB, Eurostat, Danske Bank Markets

Greek liquidity outflow creates Target2 claims

Injected liquidity stays within Greece Some of the injected liquidity flows away from Greece

LiabilitiesAssets

Bank of Greece

LiabilitiesAssets

Bank of Greece

Injected liquidity stays within Greece j q y y

Other

Liquidity operations

Domestic deposits

Other Other

Liquidity operationsDomestic depositsfrom Greek banks

Other

Portfolio of purchased assets

from Greek banksPortfolio of

purchased assetsTarget2 liability

Other central bank (Bundesbank)

Liabilities

Other

Li idit ti

Assets

Other

Portfolio of purchased assets

Liquidity operationsDomestic deposits

from German banks

Target2 claims Foreign deposits

Note: In case of a Greek default, the loss due to the Target2 exposure will be divided among the Eurosystem�s national central banks according

19www.danskebank.com/CI

Source: Danske Bank Markets

Target2 claims Foreign depositsEurosystem s national central banks according to the ECB�s capital key (see slide 18)

The ECB kept the Greek banking sector alive

95 ECB ELA to GreeceEUR bn

European banks� exposure to Greece considerably lower

350

USD bn

75

80

85

90

250

300

European banks exposure to Greece

60

65

70

February 15 March 15 April 15 May 15 June 15

ELA to Greece (bn EUR)

100

150

200ELA to Greece (bn EUR)

190

200

210

220 Household and corporations' deposits with Greek banks EUR bn

0

50

05 06 07 08 09 10 11 12 13 14

130

140

150

160

170

180

120

130

2010 2011 2012 2013 2014 2015

Deposits with Greek banks

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Source: BIS Foreign claims by nationality of reporting banks, immediate borrower basis, Danske Bank Markets

ECONOMIC SPILL-OVER

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Financial contagion has remained very limited

Periphery yields shielded by the ECB�s instruments Euro stocks rose on the back of improved growth outlook

22www.danskebank.com/CI

Source: Bloomberg, Danske Bank Markets

A Grexit is likely to affect business and consumer sentiment

Consumer confidence remains at a high level Business confidence improves despite Greek uncertainty

23www.danskebank.com/CI

Source: European Commission, Eurostat, Markit PMI, Danske Bank Markets

Greece�s destiny will impact elections in Spain and Portugal 2015

Portugal general election Between 20 Sep and 11 Oct

Spain general election Before 20 Dec

2016

Ireland general election Before 3 Apr

2017

Portugal local election In or before 2017

2018

Italy general election In or before 2018

2019

Spain local election May 2019

Ireland local election

24www.danskebank.com/CI

Source: IMF, Danske Bank MarketsIreland local election

2019

Spain�s and Portugal�s economic situation much stronger

The Spanish and Portuguese economies are recovering� � and the unemployment rates are declining

25www.danskebank.com/CI

Source: Eurostat, Danske Bank Markets

But political sentiment changes towards euro-sceptic parties

In Spain, Podemos� power to increase, but no majority Polls in Portugal suggest less power to euro-sceptic PDR

5050 %% Spanish election pools

40

45

40

45 %% Portugese election pools

4040

30

35

40

30

35

40

20

30

20

30

15

20

25

15

20

25

1010

0

5

10

0

5

10

jun-11 dec-11 jun-12 dec-12 jun-13 dec-13 jun-14 dec-14 jun-15

00nov-11 maj-12 nov-12 maj-13 nov-13 maj-14 nov-14 maj-15 nov-15

People's Party (PP) Podemos Spanish socialist worker's party (PSOE)

Social Democratic Party (PSD) CDS-People's Party (CDS-PP)

Democratic Republican Party (PDR) Socialist Party (PS)

Portugal Ahead (PSD + CDS-PP)

26www.danskebank.com/CI

Source: Danske Bank Markets

27 www.danskebank.com/CI

Recent research about the situation in Greece

• Grexit - what if? Greek referendum changes the game, 29 June 2015

• Spillovers to Scandi market from Greek crisis, 29 June 2015

• Greece - implications for Fed , 29 June 2015

• Presentation: Scenarios for Greece - Summer Crunch Time, 22 June 2015

• Grexit – What If? Implications for euro and Scandi markets, 28 April 2015

• Grexit – what if? Don’t expect any solution before the summer crunch time, 22 April 2015

DisclosuresThis research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (�Danske Bank�). The author of this research report is PernilleBomholdt Henneberg, Senior Analyst., Anders Vestergård Fischer, Senior Analyst, and Anders Møller Lumholtz, Chief Analyst.

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