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News analysis: Greece teeters on new crisis

Fund managers have become more optimistic about continental Europe of late but may need to be aware of risk rising again as policymakers clash over the cost of recapitalising the Greek banking system.

Athens has estimated it needs less than €6bn (£4.9bn) of new capital, a figure arrived at by the Greek central bank after a report by BlackRock, which was also handed to monitors from the so-called troika of the European Union, European Central Bank (ECB) and International Monetary Fund.

The troika estimates that Greece needs close to €20bn, while BlackRock puts the figure at €30bn.

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So will Greece need a third bailout when the remaining €10.1bn in EU funding in the current €172bn bailout runs out later this year?

Kerry Craig, market strategist at JPMorgan Asset Management, thinks investor attitudes towards Greece, and the periphery more broadly, have changed and that the realisation that countries can be bailed out suggests investors expect that could happen again with Greece.

“This means the current debate should have less of an impact on market confidence,” he explains.

“The economic outlook for the peripheral economies is the brightest in many years, and in my view, has made markets more tolerant of political uncertainty. The continued decline in peripheral government bond yields is a good indication of this.

“However, the downside of cheaper borrowing costs is that governments will feel less pressure to carry out market reforms.”

But Mr Craig admits the markets will place more weight on what independent advisers say, rather than figures provided by the Greek government or the IMF.

“These numbers from the private sector are the result of a very long and detailed due diligence process and will highlight the true needs of the Greek financial system,” he says.

Azad Zangana, Schroders’ European economist, sees Greece as relatively low risk, given that most international investors have exited the Greek markets, especially the banking sector.

“If we saw the disagreement spill over into additional government help, in terms of future funding, then it could potentially have an impact on market confidence,” he claims.

“But we know that the vast majority of Greek government debt is now owned by other European governments and the ECB, so even there the potential losses would be small. So there’s very limited chance that this will spill over into a major market event.”

Bryn Jones, Rathbone Unit Trust Management’s head of fixed income, believes that the Greek banks’ success in negotiating down after recent stress tests the level of cash they need relative to the size of their assets – known as the core tier 1 capital ratio – from 9 per cent to 8 per cent could mean they need far less than €30bn.

“The actual capital hole is unlikely to be as high as €30bn under the stress test,” he says.

“It’s more likely to be in the region of €4bn-€7bn. We are talking about the big four Greek banks – Alpha, Piraeus, Eurobank and National Bank.”