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28 May 2015
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Grexit scenario review
Frederik Ducrozet Senior Eurozone Economist, +33 1 41 89 98
95
Mohit Kumar Global Head of Rates Strategy, +44 20 7214 6651
Valentin Marinov Head of G10 FX Research & Strategy, +44 20
7214 5289
Harpreet Parhar, CFA Head of Credit Strategy, +44 20 7214
5534
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28 May 2015 Page 1
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
Greece vital statistics Who owns the Greek debt?
Greece fundamentals Grexit Scenario Review
Greek debt maturity profile
Greek debt holders % domestic debt
Germany 56 4% France 42 2% Italy 37 2% Other EZ 34 IMF 32 Spain
25 2% ECB 20 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.
2013 2014 2015 2016GDP (%, 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
European Commission Forecasts (May 2015)
Source: Bloomberg
Source: EC
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28 May 2015 Page 2
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:
20% recovery rate -> 83% 30% recovery rate ->94% 40% recovery
rate ->110%
Higher risks How is the risk of a Grexit evolving?
Market no longer perceives Greece as a threat to the financial
sector (hybrid pricing, spreads tightening, etc) and it is
right
Greece perceived as an isolated case in Europe Greek debt owned
by sovereigns not FI Greek people still willing to stay in the
Eurozone at any cost
Lower risks Greece vs other peripheral spreads
Greeces situation: what has changed since 2013?
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)
0
10
20
30
40
50
60
0
100
200
300
400
500
600
700
800
4-Jan-10 4-Jan-11 4-Jan-12 4-Jan-13 4-Jan-14 4-Jan-15Average 5Y
CDS (SP, It, Por) GRE5Y/Av(Sp, It, Por)- rhs
Grexit Scenario Review
Source: Crdit Agricole CIB
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28 May 2015 Page 3
Potential scenario until year-end Grexit Scenario Review
Grexit
Contained Greece + Portugal The end of EUR
FX: Temporary weakness in EUR/USD on contagion risk followed by
strengthening.
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
The weak get weaker impacting the core vs periphery at least
temporarily.
12.5% probability 4.5% probability
0-5% probability
FX: Sharper deterioration of EUR/USD reflecting sharp confidence
shock.
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)
Greece + Portugal = c.EUR560bn. Default would surpass size of
reserve account. Political climate deteriorates as Eurozone policy
seen as a failure.
FX: Splintering of the Eurozone into DM-bloc currencies and the
rest.
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
Additional Exit looks unsustainable both fundamentally and
politically. Political uncertainty rises across Europe.
3% probability
Status quo Orderly Restructuring
FX: Consistent with FX market expectations at present. Muted
EUR/USD impact.
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
Rates: Peripherals rally, testing the April lows (90-100bp
spread to Bunds). Curves flatten on duration-extension trades.
60% probability 20% probability
FX: EUR/USD initially weaker on the back of heightened
uncertainty, followed by recovery
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.
Rates: Short-term volatility in peripheral spreads and rally in
Bunds. Italian spreads could widen 75-100bp but come back over the
medium term
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.
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).
No Grexit
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28 May 2015 Page 4
Conclusions Grexit Scenario Review
Orderly restructuring Grexit contained Grexit
+ Portugal Comment
Macro Temporary increase in risk aversion + drag on the economy
but ultimately reduced uncertainty at a moderate cost to
creditors
Direct impact: Russia, Italy and Turkey Indirect impact:
Confidence shock, political precedent
Direct impact: Portugal itself, then Spain, Italy Indirect
impact: Broad-based confidence shock
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.
Rates (short-term impact)
Italy/Spain spreads: +100bp Bunds 10Y: -30bp Italy 5Y10Y curve
steeper by 50bp
Italy/Spain spreads: +200bp Portugal : +400bp Bund 10Y:
-60bp
Italy/Spain spreads: +400bp Bund 10Y: -100bp
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.
FX (short-term impact)
EUR/USD at 1.04 (vs 1.11) EUR/USD: 1.00 (vs 1.11) EUR/USD: 0.96
(vs 1.11)
EZ without Greece seems stronger but its image is damaged for
good. This would be seen as a long-term negative.
Credit (short-term impact)
After one-week iTraxx Europe: 100bp (vs 63bp) iTraxx Sr. Fins:
124bp (vs 76bp) iTraxx Crossover: 461bp (vs 285bp) iBoxx Non-Fin.
EU: 86bp (vs 52bp) iBoxx Non-Fin. Periph: 151bp (vs 69bp) iBoxx Sr.
Bank EU: 86bp (vs 41bp) iBoxx Sr. Bank Periph: 189bp (vs 73bp)
After one-week iTraxx Europe: 130bp iTraxx Sr. Fins: 154bp
iTraxx Crossover: 602bp iBoxx Non-Fin. EU: 112bp iBoxx Non-Fin.
Periph: 206bp iBoxx Sr. Bank EU: 119bp iBoxx Sr. Bank Periph:
254bp
After three-months iTraxx Europe: 164bp iTraxx Sr. Fins: 207bp
iTraxx Crossover: 752bp iBoxx Non-Fin. EU: 148bp iBoxx Non-Fin.
Periph: 277bp iBoxx Sr. Bank EU: 170bp iBoxx Sr. Bank Periph:
313bp
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.
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Page 5 28 May 2015
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 Page 6
Direct impact 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
Grexit fundamental analysis
142
53
32
30
20
35EFSF
Bilateral loans
IMF
Private sector PSIbonds
ECB (SMP)
Others
Breakdown of Greeces public debt
Grexit Scenario Review
2010As of October
As of April 30, 2013
Second programme
First programme
Initial contribution key %
EFSF amended*
contribution key %
EFSF amended*contribution
key %
Amount
Amount disbursed for Greece under
EFSF
GLF amount disbursed to Greece
Autriche Austria 2.78 2.99 2.99 21.6 3.9 1.6Belgique Belgium
3.47 3.72 3.73 27.0 4.9 2.0Chypre Cyprus 0.2 0.21 0.00 0.0 0.3
0.1Estonie Estonia 0.26 0.27 0.28 2.0 0.4 0.1Finlande Finland 1.79
1.92 1.93 14.0 2.5 1.0France France 20.31 21.83 21.88 158.5 28.6
11.5Allemagne Germany 27.06 29.07 29.13 211.0 38.1 15.4Grce Greece
2.81 0 0.00 0.0 0.0 0.0Irlande Ireland 1.59 0 0.00 0.0 0.0
0.0Italie Italy 17.86 19.18 19.22 139.3 25.1 10.1Luxembourg
Luxembourg 0.25 0.27 0.27 1.9 0.4 0.1Malte Malta 0.09 0.1 0.10 0.7
0.1 0.1Pays Bas Netherlands 5.7 6.12 6.14 44.4 8.0 3.2Portugal
Portugal 2.5 0 0.00 0.0 0.0 0.0Slovaquie Slovakia 0.99 1.06 1.07
7.7 1.4 0.6Slovnie Slovenia 0.47 0.51 0.51 3.7 0.7 0.3Espagne Spain
11.87 12.75 12.77 92.5 16.7 6.7
Total 100 100 100 724.47 130.9 52.9
Source: EFSF * The amended contribution key takes into account
the stepping out of Greece, Ireland, Portugal and Cyprus.
Amount of guaranteed loans
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Page 7 28 May 2015
Rates 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
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28 May 2015 Page 8
Current Greek debt structure largely in official sector Total
debt: ~ EUR320bn Private sector PSI bonds: ~EUR30bn ECB holdings:
~EUR20bn
Total marketable Greek debt: EUR30bn
European long-term government securities (>1Y):
~EUR7trn
Greek marketable debt constitutes less than 0.5% of European
long-term government securities
Total banking exposure to Greece (including loans, source BIS):
~ USD50bn
Greek debt vs Europe current status
Source: Treasury, IMF, ECB, Crdit Agricole CIB
Banks exposure to Greece (USDbn)
Grexit Scenario Review
Source: Crdit Agricole CIB
Breakdown of Greeces public debt (EURbn)
142
53
32
30
20
35EFSF
Bilateral loans
IMF
Private sector PSIbonds
ECB (SMP)
Others
28
13 13
2 2 1 1 10
5
10
15
20
25
30
Germany UK US Swiss France N'lands Other EZ OtherRoW
EUR bn
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28 May 2015 Page 9
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
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28 May 2015 Page 10
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)
Greek debt default: Indirect impact
Holders of peripheral debt
Source: ECB, Crdit Agricole CIB
Grexit Scenario Review
Resident Banks
NCB Other MFIOther
ResidentsNon-
Residents
Greece 320 3.0% 1.8% 2.0% 0.8% 92.5%
Italy 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%
Percentage of HoldingsTotal
(EURbn)
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28 May 2015 Page 11
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
Greek debt default: orderly restructuring Grexit Scenario
Review
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28 May 2015 Page 12
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
Greek debt default: Scenario 1 Grexit contained Grexit Scenario
Review
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28 May 2015 Page 13
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
Greek debt default: Scenario 2 contagion spreads Grexit Scenario
Review
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Page 14 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 Page 15
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.
FX impact from Grexit (1) how deep a sell-off?
The ERM crisis pushed (back-calculated) EUR down by 25% between
Sept 1992 and July1993
75
80
85
90
95
100
105
110
115
120
125
242220181614121086420-2-4-6-8-10-12-14-16-18-20-22-24EURUSD
1990s (=100 in Sept 1992) EURUSD 2010s (=100 in May 2015)
GBP leavesERM
Months
Grexit Scenario Review
Source: Crdit Agricole CIB
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28 May 2015 Page 16
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.
FX impact from Grexit (2) how deep a sell-off?
Simulated EUR/USD changes under two Grexit scenarios
Scenario 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
Grexit Scenario Review
Source: Credit Agricole CIB
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28 May 2015 Page 17
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
FX impact from Grexit (3) how long until a rebound? Grexit
Scenario Review
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Page 18 28 May 2015
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
0
100
200
300
400
500
600
700
800
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Jan-15
RC Banks 5-7
RC Banks core SEN RC Non-financial Non-Peripheral 5-7 RC
Non-financial Peripheral 5-7 RC Sr. Bank Non-Peripheral 5-7 RC
FinancialPeripheral
Source: Credit Agricole CIB
-
Grexit: The potential for contagion into credit markets
Page 19
Credit spreads will widen but by how much will depend upon the
following four risk factors 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
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.
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.
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.
Why would spreads widen? (Up to one month from event)
Liquidity profile of Eurostoxx 600 non-financials (EURbn)
0102030405060708090100
0
100
200
300
400
500
600
700
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Europe Periphery (rhs)
Grexit Scenario Review
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Status QuoOrderly
RestructuringContained
GrexitGreece +
Portugal exitThe end of the
euroRisk aversion - 75% 60% 45% 40%Refinancing risk - 12% 20%
25% 35%Fundamental risk - 10% 15% 20% 23%Downgrade risk - 3% 5% 10%
2%
European HY: 2015 refinancing European IG: Historical
maturities
Source (all charts): Bloomberg, Credit Agricole CIB
0
2
4
6
8
10
Jan
Feb
Mar
Apr
May Jun
Jul
Aug
Sep
Oct
Nov
Dec
Maturity First ca ll
0
20
40
60
80
100
2012 2013 2014 2015
Per ipheryOther Eurozone
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Page 20 28 May 2015
Spread forecasts under our five scenarios Grexit Scenario
Review
Grexit
Contained Greece + Portugal The end of the
euro
12.5% 4.5% 3.0%
Status quo Orderly restructuring
60% 20%
No Grexit
Current
Source: Credit Agricole CIB
iTraxx spreads Europe 63 Senior Financials 76 Crossover 285
iBoxx Senior Non-Financials (IG) European 52 Peripheral 69iBoxx
Senior Banks (IG) European 41 Peripheral 73
+1w +1m +3m End-2015100 79 70 72124 94 77 69461 358 319 326
86 74 60 62151 124 80 83
86 70 52 55189 145 85 88
+1w +1m +3m End-2015130 121 95 66154 139 110 77602 555 429
301
112 105 84 58206 195 149 88
119 111 87 53254 243 199 101
+1w +1m +3m End-2015130 121 164 150154 139 207 189602 555 752
679
112 105 148 139206 195 277 261
119 111 170 161254 243 333 313
+1w +1m +3m End-2015130 121 189 N/A154 139 227 N/A602 555 900
N/A
112 105 177 N/A206 195 410 N/A
119 111 213 N/A254 243 575 N/A
+1w +1m +3m End-201569 57 65 6782 65 72 73
315 259 297 305
54 49 57 6073 64 73 76
45 39 48 5179 62 73 76
-
Spread forecasts: historical context
Page 21
Eurozone (minus periphery) non-financial senior spreads
Grexit Scenario Review
40
60
80
100
120
140
160
180
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
HistoricScenario 2Scenario 3Scenario 4Scenario 5
Periphery non-financial senior spreads
50
100
150
200
250
300
350
400
450
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
HistoricScenario 2Scenario 3Scenario 4Scenario 5
Eurozone (minus periphery) bank senior spreads
Periphery bank senior spreads
30
60
90
120
150
180
210
240
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
HistoricScenario 2Scenario 3Scenario 4Scenario 5
50
100
150
200
250
300
350
400
450
500
550
600
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
HistoricScenario 2Scenario 3Scenario 4Scenario 5
We would envisage a reasonably quick recovery in spreads in
Scenarios 2 & 3 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
Perversely, we could see spreads in Scenario 3 outperform
Scenarios 1 & 2 by year-end 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
Source (all charts): Credit Agricole CIB
-
28 May 2015 Page 22
Potential impact on single-name credits Direct exposure
Page 22
Greece is a small player within the corporate bond market 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
Due to rating constraints there are no Greek bonds in the IG
index and only EDP from Portugal is represented
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
Rating methodologies to trigger automatic downgrades Best rated
Greek company is Titan with a BB rating (CCC+ for Greece) Corporate
ratings often linked to the rating of its related sovereign
S&P considers Banks, Utilities and Infrastructure as highly
sensitive to country risk (max 2 notch differential)
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 Debt is euro-denominated vs
most cash-flows likely to be
redenominated into drachma In a stress test scenario, non-Greek
activities will still have value but this would likely be below the
level of net debt
Alternative scenarios Nationalisation process of strategic
activities Some potential support from shareholders
Largest Greek bond issuers (EURbn)
What if? the OTE example
Gross debt
Cash
EV of Albania
EV of 54% RomTel+70% Cosmote Rom.
Pension + Leavers
0
500
1,000
1,500
2,000
2,500
Liabilities Assets
0
5
10
15
20
25
Natio
nal
Bank
of
Gree
ceEu
roba
nkEr
gasia
s
Alph
a Ba
nk
Pira
eus
Bank
Fina
nsba
nk(N
BG)
Navio
usM
aritim
e
OTE
Helle
nic
Petro
leum
Helle
nic
Railw
ay
Drill
Rigs
(Dry
Shi
ps)
Grexit Scenario Review
Composition of European HY index
0
50
100
150
200
250
300
350
0%10%20%30%40%50%60%70%80%90%
100%
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Jan-
13Ju
l-13
Jan-
14Ju
l-14
Jan-
15M
ay-1
5
Worldwide
Other EU
Portugal
Italy
Ireland
Greece
Spain
TotalOutstanding
Source: Bloomberg, Credit Agricole CIB
Source: Markit, Credit Agricole CIB
Source: OTE
-
Potential impact on single name credits (continued)
Page 23
Few corporates exposed to the Greek economy Some players doing
business in Greece, very few issuing debt at
subsidiary level Initial agreement to privatise c.EUR3.0bn worth
of assets in 2015
(Ports, Airports, Electricity networks, ) Telecoms: Deutsche
Telekom via OTE and Vodafone Infrastructure: Fraport recently
acquired regional airports (EUR1.2bn
deal yet to be closed) Cement: Lafarge (local plants
representing 1.7% of LafargeHolcims
cement capacity, exporting to the rest of Europe)
Banks exposure to Greece cut massively Sovereign debt holdings
reduced massively, notably following PSI back
in 2012 with an average haircut in net present value of 75% and
a 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
Remaining exposure now mostly on large corporates, generally in
CIB divisions and to shipping companies with mortgages on ships and
USD
No gains expected from deposit flight to quality because of low
amounts of domestic and very likely capital control measures
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
Source all charts: Credit Agricole CIB
Indirect exposure Cross-border M&A deals with Greek
assets
European bank exposure to Greece and Portugal (EURm)
Sensitivity of European sectors to GDP, EUR/USD and rates
Deal Type Date Target Bidder Seller Value (EURm)M&A Dec-13
Hellenic Duty Free Dufry Float 450 Investment Feb-14 Athens Water
Supply Paulson Piraeus Banks 120 M&A Nov-13 Pangaea REIC Invel
Real National Bank of Greece 885 M&A Jun-14 Oceanbulk shipping
Stark Bulk Carriers Private investors 610
M&A Pending Regional airports Fraport Privatization 1,200
M&A Pending Piraeus Port Cosco Privatization 500 M&A
Pending Electricity netw ork Terna, Elia, SGCC, PSP Privatization
1,000 M&A Pending Gas netw ork SOCAR Privatization 400
0
1000
2000
3000
4000
BB
VA
CS
G
Inte
sa S
P
KB
C
Mon
te
San
tan
der
Sw
edb
ank
SH
B
Lloy
ds
Sta
nda
rd
UB
S
SE
B
Bar
clay
s
Com
me
rz
SG
Deu
tsch
e B
k
RB
S
BN
P P
arib
as
HS
BC
Greece Portugal
86698504
Grexit Scenario Review
Sensitivity to: Autos Retail/Cons. Cap. Goods Infra. Aerospace
Industrials Utilities Telecoms BanksNeutral Neutral Neutral Neutral
Neutral Neutral Neutral Neutral Neutral
0.5% of E car market Fraport OTE, DT, Vodafone noneStrong Ret.:
Strong Strong Medium Medium Strong Low Low Strong
Peugeot, Faurecia Cons.: Medium Alstom Saint-Gobain Veolia, Suez
TIM, TEF, VOD EZ retail bksStrong Ret.: Low Strong Low Strong
Strong Medium Low Medium
BMW, DAI, VW, FCA Cons.: Strong Airbus DT, Vivendi CIBs Strong
Medium Medium Medium Medium Medium Strong Medium Strong
BMW, DAI, VW, RNO EDF, Enel
GDP (Eurozone)
EUR/USD
Rates
GDP (Greece)
-
28 May 2015 Page 24
Disclosure/Disclaimer
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Grexit scenario reviewGreece fundamentalsGreeces situation: what
has changed since 2013?Potential scenario until
year-endConclusionsMacro Grexit fundamental analysis RatesGreek
debt vs Europe current statusGreek debt default: Investor
impactGreek debt default: Indirect impactGreek debt default:
orderly restructuringGreek debt default: Scenario 1 Grexit
containedGreek debt default: Scenario 2 contagion spreadsFXFX
impact from Grexit (1) how deep a sell-off?FX impact from Grexit
(2) how deep a sell-off?FX impact from Grexit (3) how long until a
rebound?CreditGrexit: The potential for contagion into credit
marketsSpread forecasts under our five scenariosSpread forecasts:
historical contextPotential impact on single-name credits Potential
impact on single name credits (continued)Disclosure/Disclaimer