28 May 2015

Grexit scenario review

Frederik Ducrozet

Valentin Marinov

Senior Eurozone Economist, +33 1 41 89 98 95

Head of G10 FX Research & Strategy, +44 20 7214 5289

Mohit Kumar

Harpreet Parhar, CFA

Global Head of Rates Strategy, +44 20 7214 6651

Head of Credit Strategy, +44 20 7214 5534

https://catalystresearch.ca-cib.com

for disclosures please see final page

Crdit Agricole Corporate and Investment Bank is authorised by the Autorit de Contrle Prudentiel et de Rsolution (ACPR) and supervised by the ACPR and
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Grexit Scenario Review

Greece fundamentals
Greece vital statistics

GDP: -0.2% QoQ (Q1); HICP inflation: -1.8% YoY (Apr); IP: +5.0% YoY (Mar)

Unemployment rate: 25.4% (Feb)

Strong budget execution (EUR2.4bn ahead of target in Jan-Apr) on expenditure

cuts, but the available cash deposits fell to EUR800m in March

European Commission Forecasts (May 2015)

2013 2014 2015 2016
GDP (%, yoy)

-3,9

0,8

0,5

2,9

Inflation (%, yoy)

-0,9

-1,4

-1,5

0,8

Unemployment (%)

27,5

26,5

25,6

23,2

Budget balance (% of GDP)

-12,3

-3,5

-2,1

-2,2

Public debt (% of GDP)

175,0

177,1

180,2

173,5

Source: EC

Greek debt maturity profile

Source: Bloomberg

Page 1

28 May 2015

Who owns the Greek debt?

Greek debt holders
56
Germany
42
France
37
Italy
34
Other EZ
IMF
32
Spain
25
20
ECB
Greek banks
11
Foreign banks
2.4
AM, insurers, HF, etc
48.8
Other loans
10.5
Bank of Greece
4.3
Source: Open Europe, IMF EFSF, Greek public debt mgmt office.

% domestic debt
4%
2%
2%

2%

Grexit Scenario Review

Greeces situation: what has changed since 2013?

Higher risks

How is the risk of a Grexit evolving?

A higher Grexit probability vs lower contagion risk (confirmed by

CDS market see below)

CDS pricing anticipates a non-orderly default or restructuring. The

current implied probability for 1Y CDS (6600bp) is as follows:

Incentive to maintain Greece has reduced (Germany, ECB) on

perception of limited risk for Eurozone amid stronger safety nets and
QE

New Greek government + recent political decisions

Greece increasingly perceived as an isolated case (market

becoming complacent about the default risk)

Lower risks

20% recovery rate

-> 83%

30% recovery rate

->94%

40% recovery rate

->110%

Greece vs other peripheral spreads

Market no longer perceives Greece as a threat to the financial

sector (hybrid pricing, spreads tightening, etc) and it is right

800

Greece perceived as an isolated case in Europe

600

Greek debt owned by sovereigns not FI

500

Greek people still willing to stay in the Eurozone at any cost

400

60

700

50
40
30

300

20

200
10

100
0
4-Jan-10

0
4-Jan-11

4-Jan-12

Average 5Y CDS (SP, It, Por)

Source: Crdit Agricole CIB

Page 2

28 May 2015

4-Jan-13

4-Jan-14

4-Jan-15

GRE5Y/Av(Sp, It, Por)- rhs

Grexit Scenario Review

Potential scenario until year-end

No Grexit
Status quo

Grexit

Orderly Restructuring

Contained

Greece + Portugal

The end of EUR

60% probability

20% probability

Greek and ECB officials keep

kicking the can down the road to
the next repayment period. No
referendum taking place nor ECB
cutting the line.

No deal (and possibly a missed

payment) leads to Greek
referendum, which ultimately
avoids a Grexit but leads to
new debt restructuring. Capital
controls possible in the transition.

The weak get weaker impacting

the core vs periphery at least
temporarily.

Greece + Portugal =
c.EUR560bn. Default would
surpass size of reserve account.
Political climate deteriorates as
Eurozone policy seen as a
failure.

Additional Exit looks

unsustainable both
fundamentally and politically.
0-5%
probability
Political
uncertainty
rises across
Europe.

Rates: Peripherals rally, testing

the April lows (90-100bp spread
to Bunds). Curves flatten on
duration-extension trades.

Rates: Short-term volatility in

peripheral spreads and rally in
Bunds. Italian spreads could
widen 75-100bp but come back
over the medium term

Rates: Pressure on EZ sovereign

ratings. Several downgrades
expected even if not automatic
according to RA.

Rates: Immediate selling on

Spain expected before ECB
steps in.

Rates: Bunds would outperform

rest of Eurozone bonds and
probably fall into negative
territory (safe haven vs
volatility).

FX: Consistent with FX market

expectations at present. Muted
EUR/USD impact.

FX: EUR/USD initially weaker on

the back of heightened
uncertainty, followed by recovery

FX: Temporary weakness in

EUR/USD on contagion risk
followed by strengthening.

FX: Sharper deterioration of

EUR/USD reflecting sharp
confidence shock.

FX: Splintering of the Eurozone

into DM-bloc currencies and the
rest.

Credit: We only expect a limited

spread rally to follow an
agreement as an adverse
scenario has not really been
priced . Peripheral credits may
rally a little but recent
underperformance has been
extremely limited. After an initial
bounce spreads likely to struggle
for traction due to new issue
supply, the fact that Greece has
not really been resolved, summer
(il)liquidity and rising concerns of
a Fed rate hike in September

Credit: Biggest spread driver

likely to be risk aversion as we
expect limited impact long term
on primary market access,
fundamentals and the banking
sector. Spread reaction
dependent upon ECB and
political action but repricing in
line with other markets, eg, rates.
However this should be reversed
out fairly quickly.
Some spread premium to remain
in peripheral credits.

Credit: Widening still

predominantly driven by risk
aversion but with refinancing and
fundamental risk becoming more
important. Primary market closed
for a short time but accessible
only those issuers willing to pay
up. Greater ECB liquidity, better
clarity on Greece (by year-end)
than Scenarios 1 & 2, contained
contagion and the Fed likely to
push back a rate hike could
mean this is the most optimal
end-2015 scenario for spreads

Credit: A Portugal exit from the

euro is unlikely to be immediate
and could take many months to
build. The period of uncertainty
could extend to least three
months, which will keep spread
levels elevated and all peripheral
funding costs high.
Bank underperformance
significant as cross-border
banking exposures back in the
spotlight. Some large European
banks exposed (>EUR5bn) to
Portugal (Santander, Barclays)

Credit: Refinancing risk

becomes a much greater issue
here and market pricing is likely
to become almost random,
particularly for peripheral credits.
Core/semi-core credits will also
be under huge pressure due to
uncertainty over redenomination
risk, currency mismatches and
balance sheet quality.
Primary market likely to be
closed for an extended period of
time

Page 3

28 May 2015

12.5% probability

4.5% probability

3% probability

Grexit Scenario Review

Conclusions
Orderly restructuring

Macro

Temporary increase in risk aversion

+ drag on the economy
but ultimately reduced uncertainty
at a moderate cost to creditors

Rates

Italy/Spain spreads: +100bp

Bunds 10Y: -30bp
Italy 5Y10Y curve steeper by 50bp

(short-term impact)

FX

Grexit
contained

Grexit
+ Portugal

Direct impact: Russia, Italy and

Turkey

Direct impact: Portugal itself,

then Spain, Italy

Indirect impact: Confidence shock,

political precedent

Indirect impact: Broad-based

confidence shock

Italy/Spain spreads: +200bp

Portugal : +400bp
Bund 10Y: -60bp

Italy/Spain spreads: +400bp

Bund 10Y: -100bp

EUR/USD at 1.04 (vs 1.11)

EUR/USD: 1.00 (vs 1.11)

EUR/USD: 0.96 (vs 1.11)

After one-week

After one-week

After three-months

iTraxx Europe: 100bp (vs 63bp)

iTraxx Sr. Fins: 124bp (vs 76bp)
iTraxx Crossover: 461bp (vs 285bp)

iTraxx Europe: 130bp

iTraxx Sr. Fins: 154bp
iTraxx Crossover: 602bp

iTraxx Europe: 164bp

iTraxx Sr. Fins: 207bp
iTraxx Crossover: 752bp

iBoxx Non-Fin. EU: 86bp (vs 52bp)

iBoxx Non-Fin. Periph: 151bp (vs 69bp)

iBoxx Non-Fin. EU: 112bp

iBoxx Non-Fin. Periph: 206bp

iBoxx Non-Fin. EU: 148bp

iBoxx Non-Fin. Periph: 277bp

iBoxx Sr. Bank EU: 86bp (vs 41bp)

iBoxx Sr. Bank Periph: 189bp (vs 73bp)

iBoxx Sr. Bank EU: 119bp

iBoxx Sr. Bank Periph: 254bp

iBoxx Sr. Bank EU: 170bp

iBoxx Sr. Bank Periph: 313bp

(short-term impact)

Credit
(short-term impact)

Page 4

28 May 2015

Comment
The countries leaving would feel the
biggest pain, and financial contagion would
remain limited under the most benign
scenarios.
Political contagion would remain a threat
over the longer term, however.
Less of an impact than in the first round of
the sovereign crisis in scenario 1. Second
option comes back to situation already
seen in 2009 for core / peripheral spreads.

EZ without Greece seems stronger but

its image is damaged for good. This would
be seen as a long-term negative.

In an orderly restructuring and contained

Grexit spreads will hit the wides in the
week following the event. Here we expect
an almost complete retracement in
Eurozone minus periphery spreads by
year-end but a premium to remain in
peripheral spreads
In a Grexit + Portexit scenario, a
Portuguese exit will not be immediate so
spreads would remain under pressure with
the wides likely to come after three
months.

Macro
Key points:
Large, depression-like impact on the economy of the countries leaving
Limited direct impact on other countries
but any exit would set a precedent, leading to structurally higher peripheral risk
premia
Negative rating impact on EFSF / ESM (and political perception in the core)

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28 May 2015

Grexit Scenario Review

Grexit fundamental analysis

Direct impact

Breakdown of Greeces public debt

Economies with strongest trade exposure to Greece include Russia,

Turkey, Germany, Italy, Bulgaria.
Greek debt exposure
Public debt largely in official sector hands (~EUR320bn total, of which
EUR20bn in ECB holdings, EUR142bn in EFSF loans, EUR53bn in
bilateral loans and only EUR30bn in private sector PSI bonds)
Target 2 balance at EUR110bn in March (potentially higher today), of
which around 50% could translate into a loss without triggering ECB
recapitalisation (buffers include EUR400bn in revaluation accounts)
Private debt exposure seen as manageable, but creating two-tier
markets and legal issues as individual contracts have to be redefined

Rating impact mostly negative for EFSF/ESM and peripheral

sovereigns although downgrades would not necessarily come
mechanically based on agencies recent comments
Political risks may end up creating the biggest contagion
in the short term, political instability on Eurozone policy failure
in the longer term, as Greece sets a precedent
key difference between base case and worst case (full break-up)

Indirect impact
Major deflationary and confidence shock
Natural response to rising re-denomination risks would be OMT,
although the ECB is likely to expand QE in duration and size; more
negative deposit rates possible

Page 6

28 May 2015

35
EFSF
20
Bilateral loans

30

142

IMF
Private sector PSI
bonds
ECB (SMP)

32

Others
53
As of
As of April
2010
October
30, 2013
EFSF
EFSF
Initial
amended* amended*c
contribution
contribution ontribution
key %
key %
key %
Autriche
Austria
2.78
2.99
2.99
Belgique
Belgium
3.47
3.72
3.73
Chypre
Cyprus
0.2
0.21
0.00
Estonie
Estonia
0.26
0.27
0.28
Finlande
Finland
1.79
1.92
1.93
France
France
20.31
21.83
21.88
Allemagne Germany
27.06
29.07
29.13
Grce
Greece
2.81
0
0.00
Irlande
Ireland
1.59
0
0.00
Italie
Italy
17.86
19.18
19.22
Luxembourg Luxembourg
0.25
0.27
0.27
Malte
Malta
0.09
0.1
0.10
Pays Bas
Netherlands
5.7
6.12
6.14
Portugal
Portugal
2.5
0
0.00
Slovaquie Slovakia
0.99
1.06
1.07
Slovnie
Slovenia
0.47
0.51
0.51
Espagne
Spain
11.87
12.75
12.77
Total
100
100
100

Amount
21.6
27.0
0.0
2.0
14.0
158.5
211.0
0.0
0.0
139.3
1.9
0.7
44.4
0.0
7.7
3.7
92.5
724.47

Amount of guaranteed loans

Second
First
programme
programme
Amount
disbursed for GLF amount
Greece under disbursed to
Greece
EFSF
3.9
1.6
4.9
2.0
0.3
0.1
0.4
0.1
2.5
1.0
28.6
11.5
38.1
15.4
0.0
0.0
0.0
0.0
25.1
10.1
0.4
0.1
0.1
0.1
8.0
3.2
0.0
0.0
1.4
0.6
0.7
0.3
16.7
6.7
130.9
52.9

Source: EFSF
* The amended contribution key takes into account the stepping out of Greece, Ireland, Portugal and Cyprus.

Rates

Page 7

Greece default = limited impact on private investors (mostly PB sector)

Impact absorbed / reserve account (European level)
Sharp market reaction to be expected though
Orderly structuring: Italy/Spain wider by 100bp, medium term little impact
Scenario 1: Italy/Spain spreads up 200bp, Portugal up 400bp
Scenario 2: further spread widening pending ECB actions

28 May 2015

Grexit Scenario Review

Greek debt vs Europe current status

Breakdown of Greeces public debt (EURbn)

Current Greek debt structure largely in official sector

Total debt: ~ EUR320bn
Private sector PSI bonds: ~EUR30bn
ECB holdings: ~EUR20bn

35
EFSF
20
Bilateral loans

30

IMF

142

Private sector PSI

bonds

Total marketable Greek debt: EUR30bn

ECB (SMP)

32

Others
53

European long-term government securities (>1Y):

~EUR7trn

Source: Treasury, IMF, ECB, Crdit Agricole CIB

Greek marketable debt constitutes less than 0.5% of

European long-term government securities
Total banking exposure to Greece (including loans,
source BIS): ~ USD50bn

Banks exposure to Greece (USDbn)

30

EUR bn

25
20
15

28

10
13

13
2

Swiss

France

0
Germany

UK

US

Source: Crdit Agricole CIB

Page 8

28 May 2015

N'lands Other EZ

Other
RoW

Grexit Scenario Review

Greek debt default: Investor impact

EFSF
EFSF funded by member states in proportion to capital keys
Loss would eventually be borne by the respective member states
Total loss of EFSF represents 0.0014% of European GDP

ECB losses can be absorbed by the reserve account (~EUR400bn)

IMF
Senior by precedence not legally
Expects to be paid in full

Bilateral loans
Losses distributed as per the capital keys

Banking sector exposure: ~USD50bn

Germany c.USD28bn (KfW c.USD17bn)

UK c.USD13bn
France <USD2bn
Potential to absorb losses higher as stronger financial systems

Private sector exposure: Less than 0.5% of European government securities

Direct impact will be limited

Page 9

28 May 2015

Grexit Scenario Review

Greek debt default: Indirect impact

Market impact

Widening of peripheral spreads

Widening of credit spreads
Rally in core and semi-core markets
Fall in equities and other risky assets
Potential increased liquidity via ECB intervention

Macro impact
Contraction of SME lending
Sustained increase in premium for peripheral
sovereign and corporate issuance
Capital flight out of peripherals and out of Europe

Institutional impact
Loss for banks and insurance companies holding
peripheral debt
Increased capital charges given rise in volatility and
rating downgrades
Pension funds face double impact as assets fall (risky
assets) and liabilities rise (core rates rally)

Page 10

28 May 2015

Holders of peripheral debt

Total
(EURbn)

Percentage of Holdings
Resident
Banks

NCB

Other MFI

320

3.0%

1.8%

2.0%

0.8%

92.5%

1,799

22.2%

5.6%

0.0%

34.3%

37.9%

Portugal

225

17.1%

0.7%

4.9%

7.2%

70.0%

Spain

996

34.0%

3.2%

6.4%

20.0%

36.4%

Greece
Italy

Source: ECB, Crdit Agricole CIB

Other
NonResidents Residents

Grexit Scenario Review

Greek debt default: orderly restructuring

Soft default possible over IMF/ECB debt
Short term: 1 to 3 weeks, Medium term: 3 to 6 months

Eventual agreement reached with orderly restructuring of Greek debt

Heightened uncertainty and risk aversion over short term, little impact over medium term
Short term

Italy/Spain spreads widen by about 100bp

Portugal by 200bp
Bunds rally by ~30bp
Italy 5Y10Y curve steeper by 50bp

Policy support to contain risks of contagion

Verbal intervention from ECB and governments
Another LTRO, OMT feasible

Medium term little market impact

Expect peripheral spreads to come back to current levels

Page 11

28 May 2015

Grexit Scenario Review

Greek debt default: Scenario 1 Grexit contained

2011 spreads widened (peak to trough) by
Over 400bp for Italy, ~ 450bp for Spain, ~1250bp for Portugal

Assessing market impact

Short term: 1 to 3 weeks, Medium term: 3 6 months

Short term

Italy/Spain spreads widen by about 200bp

Portugal by 400bp
Bunds rally by ~60bp
Italy 5Y10Y curve steeper by 100bp

Strong policy support to contain risk of contagion

ECB steps in: unlimited liquidity operations,

Another LTRO, OMT feasible
Strong European support for weaker peripherals like Portugal
Suspension of auctions till markets calm

Medium term
ECB QE tilts supply/demand imbalance but peripherals will command higher risk premium
Italy/Spain wider by 50-100bp
Portugal wider by 100-200bp

Page 12

28 May 2015

Grexit Scenario Review

Greek debt default: Scenario 2 contagion spreads

Short term

Italy/Spain spreads widen by about 400bp

Portugal nears potential restructuring and/or default
Bunds rally by ~100bp
Italy 5Y10Y curve steeper by 150bp

Strong policy support to contain risks of contagion, but policy measures insufficient to calm markets
Capital flight from peripherals leads to increase in Target 2 imbalances
Localised capital controls feasible

Bank failures and capital shortfalls on losses of peripheral debt holdings

Differentiate between HTM, AFS and trading books
Only 15-20% exposure needs to be marked to market unless potential write-downs
Regulatory relief feasible

Negative feedback loop between bank failures, capital flight and sovereign losses
Not base case but cannot be ruled out

Page 13

28 May 2015

FX
EUR/USD falling to 1.00 on Grexit scenario (contained)
Scenario 1: EUR/USD little changed
Scenario 2: EUR/USD falling to 1.04
Scenario 3: EUR/USD falling to 1.00
Scenario 4: EUR/USD falling to 0.96

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28 May 2015

Grexit Scenario Review

FX impact from Grexit (1) how deep a sell-off?

EUR/USD could hit 0.90 in the event of a Grexit:
We use the ERM crisis from September 1992, which resulted in GBP leaving the ERM and wider fluctuation bands
for the remaining currencies, as a template.
EUR/USD depreciated by c.25% during the ERM crisis. We back-calculate EUR/USD using the USD-crosses of the
EUR predecessor currencies.
From current levels this could imply a correction in EUR/USD to 0.90 from 1.11 currently.

Most FX clients seem to think that 0.90-0.95 could be the bottom for EUR/USD in the event of a Grexit.
The ERM crisis pushed (back-calculated) EUR down by 25% between Sept 1992 and July1993
125
120

GBP leaves
ERM

115
110
105
100
95
90
85

Months

80
75
-24

-22

-20

-18

-16

-14

-12

-10

-8

-6

-4

EURUSD 1990s (=100 in Sept 1992)

Source: Crdit Agricole CIB

Page 15

28 May 2015

-2

10

12

14

16

18

EURUSD 2010s (=100 in May 2015)

20

22

24

Grexit Scenario Review

FX impact from Grexit (2) how deep a sell-off?

An OLS regression model measuring EUR/USD historic sensitivity to moves in risk aversion and
Bund/peripheral yields suggests that EUR/USD can drop by:
~ -11 big figures (EUR/USD to 1.00 from 1.11 currently ) in the event of orderly Grexit;
~ -15 big figures (EUR/USD to 0.96 from 1.11 current ) in the event of contagious Grexit.

Simulated EUR/USD changes under two Grexit scenarios

German US
Bond 2Y yield
spread

10Y Peripheral
spreads to Bunds

VIX Index

EUR/USD

Grexit contained

-30bp

260bp

40 vols

~ -11bf

Grexit contagious

-40bp

500bp

55 vols

~ -15bf

Scenario

Source: Credit Agricole CIB

Page 16

28 May 2015

Grexit Scenario Review

FX impact from Grexit (3) how long until a rebound?

The most important determinant of the duration of the sell-off is the evidence of contagion.
A contained Grexit could see EUR rebounding after 3-6 months
A contagious Grexit could see EUR rebounding only after a year

During the 1992 ERM crisis the predecessors of the EUR depreciated by 25% against USD between
Sept 1992 and July 1993 (11 months).
Most clients seem to expect a relatively swift EUR-rebound post Grexit. The usual number is 3
months.
The speed of the EUR/USD rebound could be hastened by the introduction of:
Capital controls for Greece
Capital controls in other vulnerable Eurozone member states
Adequate support for the Eurozone financial sector

Page 17

28 May 2015

RC Banks 5-7

800

Credit
Key points
Risk aversion likely to be main
spread driver in Scenarios 2 & 3
No major difference in the
refinancing risk between the IG and
HY markets
Core/semi-core credits only really
impacted in Scenarios 4 & 5
Cross-border banking exposure
does not start to become important
until Scenario 4

RC Banks core
SEN
RC Non-financial
Non-Peripheral 5-7
RC Non-financial
Peripheral 5-7
RC Sr. Bank NonPeripheral 5-7
RC Financial
Peripheral

700

600

500

400

300

200

100

0
Jan-07

Jan-08

Jan-09

Source: Credit Agricole CIB

Page 18

28 May 2015

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Grexit Scenario Review

Grexit: The potential for contagion into credit markets

Page 19

Scenario 3
Contained
Grexit
60%
20%
15%
5%

Scenario 4
Greece +
Portugal exit
45%
25%
20%
10%

Scenario 5
The end of the
euro
40%
35%
23%
2%

Liquidity profile of Eurostoxx 600 non-financials (EURbn)

700

Europe

100

Periphery (rhs)

90

600

80

500

70

400

60
50

300

40

200

30
20

100

10

European IG: Historical maturities

100

2014

2013

2012

European HY: 2015 refinancing

10

Per iphery

2011

2010

2009

2008

2007

2006

Maturity

First ca ll

Other Euro zo ne
80

60

6
4

40

20

Source (all charts): Bloomberg, Credit Agricole CIB

Dec

Nov

Oct

Sep

Aug

Jul

Jun

201 5

Apr

201 4

May

201 3

Mar

201 2

Jan

0
0

Feb

4. Downgrade risk: The effect would be most pronounced for Greek

corporates but other peripheral credits could eventually get caught in the
crossfire (Scenarios 3-5). It will not become a real risk for core/semi-core
credits until scenario 5, but by this time the market has bigger things to
worry about. Downgrades will arise (1) due to direct effects from the
deterioration in credit metrics; and (2) indirectly due to rating
methodologies linked to sovereign ratings.

Risk aversion
Refinancing risk
Fundamental risk
Downgrade risk

Scenario 2
Orderly
Restructuring
75%
12%
10%
3%

2005

3. Fundamental risk: GDP at the European level will probably decline

across all our scenarios bar the first one (Status Quo), it is just a question
of magnitude. From Scenarios 2 through to 4 most of the deterioration will
come from the periphery although there will obviously be a negative
impact for core/semi-core Europe. Some of this weakness might be offset
by a depreciating euro. In Scenario 5, core/semi-core Europe is likely to be
hit hard too. Declining growth, or an outright recession, will lead to a
deterioration in corporate fundamentals and balance sheets.

Status Quo

2004

2. Refinancing risk: The primary market could seize up for a period of time,
or become punitively expensive. Peripheral credits are most exposed to
this risk but the risk also increases materially for core/semi-core credits in
Scenarios 4 and 5 where the future of the euro currency starts becoming
more questionable. Helping to mitigate this risk we have banks enjoying
better funding profiles, holding more liquidity and having better defined
access to ECB liquidity. For non-financials, many have extended their
maturity profiles and hold more cash both peripheral and other
Eurozone. In IG, refinancing needs are lower this year with EUR27bn of
maturities having already been prefunded at the start of 2015. In HY, of the
EUR33.6bn funding needed this year, EUR20bn is callable and therefore
refinancing can be delayed.

Scenario 1

2003

1. Risk aversion: Volatility in credit markets will be a function of volatility in

other European markets (particularly rates), and this in turn will be
dependent upon how the ECB and political players react to a Greek
default and euro exit

Why would spreads widen? (Up to one month from event)

2002

Credit spreads will widen but by how much will

depend upon the following four risk factors

2001

Grexit Scenario Review

Spread forecasts under our five scenarios

No Grexit

Current
iTraxx spreads
Europe
Senior Financials
Crossover

63
76
285

iBoxx Senior Non-Financials (IG)

European
52
Peripheral
69
iBoxx Senior Banks (IG)
European
41
Peripheral
73

Page 20

Status quo

Orderly
restructuring

Contained

Greece +
Portugal

The end of the

euro

60%

20%

12.5%

4.5%

3.0%

+1w
69
82
315

+1m
57
65
259

54
73

49
64

57
73

45
79

39
62

48
73

Source: Credit Agricole CIB

28 May 2015

Grexit

+3m End-2015
65
67
72
73
297
305

+1w
100
124
461

+1m
79
94
358

60
76

86
151

74
124

60
80

51
76

86
189

70
145

52
85

+1w
130
154
602

+1m
121
139
555

+3m End-2015
95
66
110
77
429
301

+1w
130
154
602

+1m
121
139
555

+3m End-2015
164
150
207
189
752
679

+1w
130
154
602

+1m
121
139
555

+3m End-2015
189
N/A
227
N/A
900
N/A

62
83

112
206

105
195

84
149

58
88

112
206

105
195

148
277

139
261

112
206

105
195

177
410

N/A
N/A

55
88

119
254

111
243

87
199

53
101

119
254

111
243

170
333

161
313

119
254

111
243

213
575

N/A
N/A

+3m End-2015
70
72
77
69
319
326

Grexit Scenario Review

Spread forecasts: historical context

We would envisage a reasonably quick recovery

in spreads in Scenarios 2 & 3

Perversely, we could see spreads in Scenario 3

outperform Scenarios 1 & 2 by year-end

Most of the spread widening is linked to risk aversion,

which should abate once markets can see the strong
policy response and that contagion risk is being limited

As long as the contagion has not spread then a Grexit

may be viewed in isolation. This also potentially
provides better clarity on Greece by year-end than the
first two scenarios. There is also likely to be more ECB
liquidity in Scenario 3 and additionally the Fed would
be less willing to raise rates in 2015 here than in the
first two scenarios

We view a euro exit by a country other than

Greece (Scenarios 4 & 5) as coming with a lag as
it is likely to be a political decision and possibly
centred around elections. This means following a
small spread recovery after one month, spreads
will start to widen again. If this risk is seen as
limited only to Portugal spreads should start to
recover in Q415.
In Scenario 5 we can have no idea where spreads
will be by year-end as there will be no common
currency spread risk will eventually be
denominated in the new local currencies and this
is likely to be quite random at first

Eurozone (minus periphery) nonfinancial senior spreads

180
160
140

Historic
Scenario 2
Scenario 3
Scenario 4
Scenario 5

450
400
350

Historic
Scenario 2
Scenario 3
Scenario 4
Scenario 5

300

120

250

100
200

80

150

60

100

40
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

50
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Eurozone (minus periphery)

bank senior spreads

Periphery bank senior spreads

240
210
180

Historic
Scenario 2
Scenario 3
Scenario 4
Scenario 5

600
550
500
450

Historic
Scenario 2
Scenario 3
Scenario 4
Scenario 5

400

150
120

350
300
250

90
60

200
150
100

30
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Source (all charts): Credit Agricole CIB

Page 21

Periphery non-financial senior

spreads

50
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Grexit Scenario Review

Potential impact on single-name credits

Telcos and most corporate sectors are classified as moderately sensitive

(max 4 notch differential)
However OTE (BB-) is considered as highly senstitive

Some Greek corporates could default

In a stress test scenario, non-Greek activities will still have value

2,000

but this would likely be below the level of net debt

1,500

Nationalisation process of strategic activities

Some potential support from shareholders

2,500

1,000

28 May 2015

Drill Rigs
(Dry Ships)

Hellenic
Petroleum

OTE

Navious
Maritime

Finansbank
(NBG)

Piraeus
Bank

Hellenic
Railway

Ireland

50

Greece

Spain
Total
Outstanding

Pension +
Leavers
EV of 54%
RomTel+70%
Cosmote Rom.
Gross debt

EV of Albania
Cash

500
0

Liabilities

Source: OTE

Page 22

Italy

Source: Markit, Credit Agricole CIB

Debt is euro-denominated vs most cash-flows likely to be

redenominated into drachma

Portugal

What if? the OTE example

Alternative scenarios

100

May-15

S&P considers Banks, Utilities and Infrastructure as highly sensitive to

country risk (max 2 notch differential)

Other EU

150

Jul-14

Corporate ratings often linked to the rating of its related sovereign

Jan-15

Worldwide

300

200

Jul-13

Best rated Greek company is Titan with a BB rating (CCC+ for Greece)

350

250

Jan-14

Composition of European HY index

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Jan-13

Rating methodologies to trigger automatic

downgrades

Source: Bloomberg, Credit Agricole CIB

Jul-12

Portuguese exposure in HY indices has increased in absolute terms but,

due to high growth in the market as a whole, on a proportional basis, ie,
as a % of total market, exposure has decreased

Jan-12

Alpha Bank

Due to rating constraints there are no Greek bonds in the IG index and
only EDP from Portugal is represented

Jul-11

10

Jan-11

Since the sovereign crisis non-financial issuance has been sporadic with
the market only really re-opening in 2014. Financial issuance distorted
by banks using bonds as collateral at the ECB

15

Eurobank
Ergasias

20

Jul-10

Greece is a small player within the corporate bond

market

Jan-10

Largest Greek bond issuers (EURbn)

25

National
Bank of
Greece

Direct exposure

Assets

Grexit Scenario Review

Potential impact on single name credits (continued)

Sovereign debt holdings reduced massively, notably following PSI back 3000
in 2012 with an average haircut in net present value of 75% and a
2000
global reduction indebt outstanding of EUR100bn

Banks with a local franchise have exited. CASA had EUR25bn retail
loans in Greece and EUR9.9bn intra-group funding at height of crisis

but all European corporates to be exposed to

Eurozone impacts

Macro slowdown: (-) Industrials & Banks / (+) Utilities and Telecoms

EUR/USD: (+) Aerospace & Autos

Rates: (-) Utilities & Telecoms / (+) Bank retail / Pension provisions

Greece

HSBC

Portugal

Sensitivity of European sectors to GDP, EUR/USD and rates

Sensitivity to:

Autos

Retail/Cons. Cap. Goods

Neutral
Neutral
GDP (Greece)
0.5% of E car market
Strong
Ret.: Strong
GDP (Eurozone)
Peugeot, Faurecia Cons.: Medium
Strong
Ret.: Low
EUR/USD
BMW, DAI, VW, FCA Cons.: Strong
Strong
Medium
Rates
BMW, DAI, VW, RNO

Source all charts: Credit Agricole CIB

Page 23

BNP Parib as

RBS

No gains expected from deposit flight to quality because of low amounts

of domestic and very likely capital control measures

1000
Deutsche Bk

8669

SG

Remaining exposure now mostly on large corporates, generally in CIB

divisions and to shipping companies with mortgages on ships and USD

8504

4000

1,200
500
1,000
400

Comme rz

Banks exposure to Greece cut massively

450
120
885
610

European bank exposure to Greece and Portugal (EURm)

Bar clays

Cement: Lafarge (local plants representing 1.7% of LafargeHolcims

cement capacity, exporting to the rest of Europe)

SEB

Privatization
Privatization
Privatization
Privatization

UBS

Infrastructure: Fraport recently acquired regional airports (EUR1.2bn

deal yet to be closed)

Fraport
Cosco
Terna, Elia, SGCC, PSP
SOCAR

Standa rd

Value (EURm )

Regional airports
Piraeus Port
Electricity netw ork
Gas netw ork

Lloyds

Telecoms: Deutsche Telekom via OTE and Vodafone

Pending
Pending
Pending
Pending

SHB

M&A
M&A
M&A
M&A

Seller
Float
Piraeus Banks
National Bank of Greece
Private investors

Swedb ank

Initial agreement to privatise c.EUR3.0bn worth of assets in 2015

(Ports, Airports, Electricity networks, )

Bidder
Dufry
Paulson
Invel Real
Stark Bulk Carriers

San tan der

Target
Hellenic Duty Free
Athens Water Supply
Pangaea REIC
Oceanbulk shipping

Monte

Some players doing business in Greece, very few issuing debt at

subsidiary level

Dec-13
Feb-14
Nov-13
Jun-14

KBC

Date

Deal Type
M&A
Investment
M&A
M&A

Inte sa SP

Few corporates exposed to the Greek economy

CSG

Cross-border M&A deals with Greek assets

BBV A

Indirect exposure

Neutral
Strong
Alstom
Strong
Medium

Infra.

Aerospace

Neutral
Fraport
Medium

Neutral

Low
Medium

Medium
Strong
Airbus
Medium

Industrials

Utilities

Telecom s

Banks

Neutral
Neutral
OTE, DT, Vodafone
none
Strong
Low
Low
Strong
Saint-Gobain Veolia, Suez TIM, TEF, VOD EZ retail bks
Strong
Medium
Low
Medium
DT, Vivendi
CIBs
Medium
Strong
Medium
Strong
EDF, Enel
Neutral

Neutral

Disclosure/Disclaimer
For disclosures go to: https://catalystresearch.ca-cib.com/web/guest/displaywebdisclosures Please click to follow the link. On the web page input the name of the relevant company to provide you with its relevant disclosure where
applicable. Where a relevant disclosure appears, the letter of the disclosure applies to the specific disclosure on that company as noted in the table on that web page.

Recommendation System:

5Y CDS recommendation

Rating target
Fundamental credit assessment:
We evaluate the fundamental credit quality trend of an issuer for the next 12
months.
Crdit Agricole CIB Credit Research evaluates the potential changes of an
issuer for the next 12 months and assigns a one-year forward rating based on
S&Ps scale. This rating is to be compared with the average long-term rating
assigned by S&P and Moodys.

Performance of credit instruments: We express our expectation of how the 5Y CDS is going to perform vis--vis its sector over a one month
timeframe. When the analyst changes a recommendation he/she should indicate in the analysis when the last recommendation was made.
SELL: CDS spreads should outperform the sector performance.
NEUTRAL:CDS spreads should perform in line
Companies where Crdit Agricole CIB provided Investment Banking
All covered companies
with the sector performance.
Services in past 12 months
(as at 1 May 2015)
BUY:CDS spreads should underperform the
Percent (of all covered companies)
Count
Percent
Count
sector performance.

Internal credit rating:

We assign a rating to a company which reflects the assessment of the credit
quality by the credit analyst. The timeframe for the rating is one year. As a rating
scale we use a scale similar to that of S&P and Fitch, however, we substitute the
rating agencies plus or minus by high and low, ie, the Crdit Agricole CIB scale
uses High-AA, Mid-AA, Low-AA, etc.

Certification
The views expressed in this report accurately reflect the personal views of the
undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not
receive any compensation for providing a specific recommendation or view in this
report. The undersigned analyst(s) or a member of his immediate family does not
hold a relevant financial interest in the securities, about which research is being published.

Frederik Ducrozet, Mohit Kumar, Valentin Marinov, Harpreet Parhar

Sell

31

31%

15

48%

Neutral

41

41%

22

54%

Buy

27

27%

12

44%

Cash recommendation (per issuer on a six-month horizon)

BUY: Overweight exposure to all the issuers bonds. It corresponds to a strong positive conviction about the issuer in terms of both credit
metrics and relative valuation aspects.
ADD: Overweight exposure to some specific bonds of the issuer. Fundamental opinion is positive on the credits underlying. Relative value
analysis can lead to overweight or maintain the position on some specific bonds.
NEUTRAL: Maintain position based on stable credit fundamentals. Relative value analysis can lead to overweight/underweight or maintain
the position on some bonds of the issuer.
REDUCE: Underweight exposure to some specific bonds of the issuer. Fundamental opinion is negative on the credits underlying. Relative
value analysis can lead to underweight or maintain the position on some specific bonds.
SELL: Underweight exposure to all the issuers bonds. It corresponds to a strong negative conviction about the issuer in terms of both credit
metrics and relative valuation aspects.
All covered companies
(as at 1 May 2015)

Companies where Crdit Agricole CIB provided Investment Banking

Services in past 12 months
Percent (of all covered companies)

Count

Percent

Count

Buy

6%

71%

Add

36

31%

17

47%

Neutral

39

33%

20

51%

Disclaimer

Reduce

33

28%

17

52%

2015, CRDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved.

Sell

2%

100%

This research report or summary has been prepared by Crdit Agricole Corporate and Investment Bank or one of its affiliates (collectively Crdit Agricole CIB) from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy,
completeness or correctness.
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Crdit Agricole CIB may at any time stop producing or updating this report. Not all strategies are appropriate at all times. Past performance is not necessarily a guide to future performance. The price, value of and income from any of the financial instruments mentioned in this report can fall as well as rise and you may make losses if you invest in
them. Independent advice should be sought. In any case, investors are invited to make their own independent decision as to whether a financial instrument or whether investment in the financial instruments described herein is proper, suitable or appropriate based on their own judgement and upon the advice of any relevant advisors they have
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Page 24

28 May 2015