EuropeanMar 10 2014

News analysis: Greece teeters on new crisis

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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.

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.”

Mr Zangana thinks it is too early to judge because the only available estimates are those from the Greek government, the troika and the BlackRock report.

“We do know that Greek banks have quite a lot of exposure to the Cypriot economy and the Turkish economy, both of which are going through their own respective crises,” he says. “The figure the report is coming up with seems reasonable and if it is more than is required, it will only help to solidify the balance sheets of those banks.”

Overall, Mr Zangana is confident that the Greek government will get the funding it needs because the economy cannot function without a healthy banking system and the troika is committed to supporting Greece in its recovery programme.

“If it all goes wrong, it’s the troika which is the main creditor now, so it would be the one with the greatest loss,” he explains.

“The funding will be provided in a way that ensures it is ring-fenced for the banking system. They tried to do this before and we know the Greek government tried to use the funding for other purposes. This time they will be stricter about how the money is used.”

So how important is the Greek banking sector and its health to investors’ overall view of Europe?

While the situation in Greece is of concern, Mr Jones says Europe can survive without one or two Greek banks and that the troika will support Greece, come what may.

“While the last thing they want is the collapse of a bank, it is only a concern, not key to the future of Europe,” he says. “The whole European project has been given the reassurance that the ECB will ‘do whatever it takes’ and I have seen nothing in the press which indicates that the ECB or any of the troika is doing anything against that.”

But is there a level at which the troika might refuse to continue supporting Greece?

Economists are loath to envisage that nightmare scenario. Instead, they expect there will be stringent conditions attached to each future funding level and at each negotiating point.

Mr Zangana says: “Greece will get the money, but it won’t be straightforward. There will be lots of conditions added, as was the case when dealing with the IMF.”

Economists also stress that it is in Greece’s interest to take the pain until it can start growing its economy again, pointing to the successful bailouts of Ireland and Portugal.

In the meantime, they see far more serious sources of risk than Greece, such as the stand-off in Ukraine, emerging market inflation and emerging market currency collapses.