Greek default fallout by ABN AMRO

Marketing Communication

Group Economics

Euro Rates Weekly

Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com

Greek default fallout?

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

26 June 2015 This is the last Euro Rates Weekly before our summer break. Regular service of the Weekly will restart 31 July.    

The whole world is watching how the Greek stalemate will evolve In the meantime, spreads of peripheral bonds and Bunds have come back from their highs Volatility in peripheral bonds is almost comparable to the levels of earlier this year The data therefore suggests that investors are less nervous of a Grexit

And the supply monitor:  Supply will be heavy out of core and periphery, but will be counterbalanced by coupon and redemptions payments Greece stalemate continues into the weekend In what is becoming a reoccurring story, discussions between

Official sector exposure to Greece (EUR bn) ECB*

Greece and the institutions are still ongoing. The gaps

EFSF/bilateral

IMF

Total

% GDP

loans

between the two sides have reportedly narrowed. On all the areas mentioned above, the differences were much bigger a

4.3

5.8

0.3

10.4

3.3

few days ago and now actually look like they can be bridged.

5.4

7.2

0.6

13.3

3.3

Today, news came out that creditors have given a proposal to

2.7

3.7

0.2

6.6

3.3

try to reach an agreement. This increases the likelihood of a

31.0

42.0

1.5

74.6

3.5

deal but tensions are still elevated. Recent events have

39.4

55.3

2.0

96.7

3.3

strengthened our base line view that a deal will be reached

26.9

36.8

1.1

64.9

4.0

eventually. All hopes are now centered on another Eurogroup

2.5

0.9

0.2

3.6

2.0

meeting which is scheduled tomorrow.

8.8

11.8

0.7

21.3

3.2

3.8

1.4

0.1

5.3

3.1

19.4

25.0

0.6

44.9

4.2

A Greek exit would have less financial and economic

Rest**

3.8

4.8

0.2

8.8

4.6

consequences than in 2012, as exposure of eurozone

Total

148.1

194.7

7.6

350.4

3.4

Which country would be hurt by a Grexit?

countries is modest. Official sector exposure amount to around EUR 350bn (see table below). This equates to 3.4% of eurozone GDP. If Greece left the eurozone by having

Sources: ECB, national central banks, EFSF, IMF, Ministries of Finance, ABN AMRO Group Economics (due to rounding figures may not add up)

defaulted on its debt, the main losses would fall on EU

* Contains bonds purchases under the Securities Market Programme as well as net MRO and LTRO borrowing

countries via exposures via the EFSF, bilateral loans and the

** Includes Cyprus, Estonia, Luxembourg, Malta, Slovakia and Slovenia

ECB (via the capital key if it did need to be recapitalized). In terms of exposure as % to GDP, Spain and Italy would be hurt most. In absolute terms, Germany, France, Italy and Spain would rank amongst the countries with the highest exposure to Greece.

Insights.abnamro.nl/en

Bloomberg: ABNM

Euro Rates Weekly - Greek default fallout? - 26 June 2015

Silence before the storm?

Intraday volatility of peripheral bonds has decreased too

While political discussions are still ongoing, the market has not

In earlier publications we have argued that the latest spike in

been sitting quietly in a corner. Market participants have

intraday volatility of Bunds can be compared to levels seen in

closely followed discussions between Greece and its creditors

the eurozone debt crisis and Lehman fallout. In contrast,

and have tried to discount possible outcomes. A possible

volatility in peripheral bonds has decreased compared to crisis

Greece fallout would directly hurt eurozone and in particular

levels. We judged that Mr Draghi’s “whatever it takes” pledge

peripheral countries, as we have observed above. These same

and QE have had a soothing effect on peripheral volatility.

countries would also suffer out of reputational or contagion risks.

The next graphs show that daily volatility of peripheral bonds is comparable to or only marginally higher than volatility levels of

If we however look at spread movements of Spanish and

earlier this year. The data suggests that investors are probably

Italian bonds vs Bunds, we see that while political discussions

less nervous than politicians are. What is more, since talks

are reaching fever pitch, spreads are not. Spreads have

between Greece and its creditors have been going for quite

peaked in the middle of June but have since then tightened

some time, we would expect that investors have had enough

remarkably.

time to position themselves. This would decrease liquidity and volatility in peripheral bonds. Since the latest reports indicate

10y SPGB – Bund spread retraced from highs

that a deal could be reached this weekend we remain

In %

cautiously supportive of peripheral country spreads.

2.00

10y SPGBs volatility is slightly higher than before 1.60

In bps

1.20

0.80

0.40 Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Yld spread SPGB 2025 - DBR 2025

20 10 0 Jan-15

Source: Bloomberg

Feb-15 Mar-15

Apr-15 May-15

Jun-15

10y SPGB intraday volatility

Same move is observed in 10y BTPs – Bund spread Source: Bloomberg

In %

Volatility of 10y BTPs is almost equal

1.6

In bps

1.2

0.8 0.4 0 Feb-15

Mar-15

Apr-15

May-15

Jun-15

Yld spread BTPs 2025 - DBR 2025

Source: Bloomberg

0 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 10y BTP intraday volatility Source: Bloomberg

Euro Rates Weekly - Greek default fallout? - 26 June 2015

Supply overview Next week, the four biggest eurozone issuers will enter the primary market. We estimate gross supply at EUR 22bn. Supply will be supported by EUR 37bn flowing back to investors. Most flows are sourced by Italian and German coupon and bond redemptions. On Tuesday, Italy will raise a combined total of EUR 7bn in 3 lines (CCTEU June 2022, BTP May 2020 and June 2025). On Wednesday, Germany will auction a new OBL October 2020 for EUR 5bn. On Thursday, Spain will hold its bond auction, but no information is available at this time. Also scheduled for Thursday is France. France will auction 3 lines OAT 2025, OAT 2035 and OAT 2041 for EUR 7 â&#x20AC;&#x201C; 8bn.

Euro Interest Rate Forecasts *denotes forecasts

Outright Yield Deposit facility Refi Marginal lending Eonia 1m Euribor 3m Euribor 2y Germany 5y Germany 10y Germany 30y Germany 2y IRS 5y IRS 10y IRS 30y IRS Curve Spreads Germany 2s5s Germany 5s10s Germany 10s30s 10y Bond Swap Spread IRS 2s5s IRS 5s10s IRS 10s30s 10y Government Bond Yield Spreads Finland Netherlands Austria Belgium France Ireland Italy Spain Portugal Greece Forecasts: ABN AMRO Group Economics

3m -0.20 0.05 0.30 -0.06 -0.01 0.02 -0.25 -0.09 0.22 0.66 0.09 0.26 0.58 0.87

1m -0.20 0.05 0.30 -0.14 -0.05 -0.01 -0.23 0.03 0.55 1.19 0.10 0.37 0.90 1.34

Now -0.20 0.05 0.30 -0.12 -0.07 -0.02 -0.20 0.13 0.87 1.68 0.13 0.57 1.28 1.81

2015Q4* -0.20 0.05 0.30 -0.08 -0.05 0.00 -0.20 0.00 0.50 1.10 0.10 0.30 0.80 1.20

2016Q1* -0.20 0.05 0.30 -0.08 -0.05 0.00 0.10 0.40 1.00 1.70 0.20 0.60 1.30 1.80

2016Q4* -0.20 0.05 0.30 0.00 0.05 0.10 0.20 0.60 1.40 2.20 0.30 0.80 1.60 2.30

3m 16 30 44 36 17 32 29

1m 25 52 64 35 27 52 44

Now 33 74 81 41 44 70 54

2015Q4* 20 50 60 30

2016Q1* 30 60 70 30

2016Q4* 40 80 80 20

20 50 40

40 70 50

50 80 70

3m 8 17 16 27 28 56 110 105 123 1087

1m 6 20 14 32 31 69 139 132 197 1133

Now 8 24 34 40 38 78 125 121 183 980

2015Q4* 3 5 8 20 25 40 95 90 145 900

2016Q1* 3 4 6 10 20 35 90 80 100 750

2016Q4* 2 3 4 8 10 20 50 30 80 450

Euro Rates Weekly - Greek default fallout? - 26 June 2015

Summary of Rate Views and Trade Ideas

Total PnL open trades (bps) Total PnL closed positions (bps) Total PnL (bps)

Perform ance is in bps, positive PnL is show n in black

Open trades Type of Trade Rationale Outright We expect 10y bund yields to drop further on the back of scarcity as well as liquidity constraints.

Trade Idea Buy DBR February 2025

ASW

Scarcity as well as more core bonds trading below the floor of -20bps will drive the ECB up the curve. This should spark outperformance of these bonds in ASW terms.

Curve

The ECB will buy up to 30y. Supply imbalances and the search for yield will bias 10s30s in core bond markets to flatten.

Credit

-140 21 -119

Start date 2/4/2015

Entry 37

Now 93

PnL -56

Buy DBR August 2046

2/4/2015

-28

-6

-22

Buy DBR August 2046 vs Sell DBR February 2025

2/4/2015

-20

Favour credit long due to QE. Outperformance is likely via outright ECB Buy BGB June 2046 vs Sell DBR July 2044 purchases and search for yield (portfolio rebalancing effect). In semi core we prefer Belgium over France. 30y OLO-Bund is more interesting than 10y OLO-Bund.

2/4/2015

-9

Credit

Same rationale as above. In periphery we prefer Spain over Italy given better Buy SPGB April 2025 vs Sell DBR February 2025 economic fundamentals.

2/4/2015

111

117

-5

ASW

We judge a Grexit will not occur, which would support tightening of EFSF bonds.

Buy EFSF July 2044

2/13/2015

-13

Credit

We think that L채nder still offer attractive value vs Bunds. We also expect L채nder bonds to be included in the PSPP programme The increase in yields have rendered 2s5s cheap. We also expect NCBs to focus their buying on relatively shorter maturing debt.

Buy NRW October 2025 vs DBR February 2025

4/24/2015

-8

Buy OBL April 2020 vs Sell June 2017

5/7/2015

-7

Curve

Closed positions Type of Trade Rationale Credit EIB trades tight vs DSLs but still offers an attractive pick up in the long end.

Trade Idea Long EIB March 2042 vs Sell DSL January 2042

Start date 2/13/2015

Close date 4/1/2015

Entry 28

Close 7

PnL 21

Key events Day

Date

Time

Country

Monday Monday Monday Monday Monday Monday

29/06/2015 29/06/2015 29/06/2015 29/06/2015 29/06/2015 29/06/2015

01:50:00 11:00:00 14:00:00 15:45:00 16:00:00

JP EC DE EC US BE

Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday

30/06/2015 30/06/2015 30/06/2015 30/06/2015 30/06/2015 30/06/2015 30/06/2015 30/06/2015 30/06/2015

09:55:00 09:55:00 10:30:00 11:00:00 11:00:00 11:00:00 15:00:00 15:45:00 16:00:00

Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday

01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015 01/07/2015

Thursday Thursday Thursday Thursday Thursday Thursday Thursday Friday Friday Friday Friday Friday

Key Economic Indicators and Events

Period

Latest outcome

Consensus

ABN AMRO

Industrial production - % mom Economic sentiment monitor - index CPI - % yoy ECB announces weekly QE details Pending home sales - % mom CPI - % yoy

May P Jun Jun P

1.2 103.8 0.7

-0.8 103.8 0.5

103.5 0.6

May Jun

3.4 0.6

1.0

1.5

DE DE GB EC EC EC US US US

Unemployment - % Unemployment change - thousands GDP - % qoq Core inflation - % yoy CPI - % yoy Unemployment - % S&P/Case Shiller house price index Chicago Fed - business confidence - index Conference Board cons. confidence - index

Jun Jun 1Q F Jun A Jun May Apr Jun Jun

6.4 -6 0.3 0.9 0.3 11.1 1.0 46.2 95.4

6.4 -5 0.4 0.8 0.2 11.1 1.0 50.5 97.2

6.4

01:50:00 03:00:00 3:45:00 03:45:00 09:30:00 10:00:00 10:30:00 14:15:00 15:45:00 16:00:00

JP CN CN CN NL EC GB US US US RU

Tankan business conditions large enterprises PMI manufacturing - index (official) PMI non-manufacturing - index (official) PMI manufacturing - index (HSBC) PMI manufacturing - index PMI manufacturing - index PMI manufacturing - index ADP nat. employment report - thousands Markit - Flash PMI ISM manufacturing - index GDP - % yoy

2Q Jun Jun Jun F Jun Jun F Jun Jun Jun F Jun 1Q F

12.0 50.2 53.2 49.6 55.5 52.5 52.0 201.0 53.4 52.8 -2.2

12.0 50.4

02/07/2015 02/07/2015 02/07/2015 02/07/2015 02/07/2015 02/07/2015 02/07/2015

09:30:00 14:30:00 14:30:00 14:30:00 14:30:00 14:30:00 14:30:00

SE US US US US US US

Policy rate - % Initial jobless claims - thousands Hourly earnings - % mom Hourly earnings - % yoy Change in employment private employment - thousands Change in employment total - thousands Unemployment - %

Jul 2 Jun 27 Jun Jun Jun Jun Jun

-0.3 271.0 0.3 2.3 262 280 5.5

03/07/2015 03/07/2015 03/07/2015 03/07/2015 03/07/2015

3:45:00 10:00:00 10:00:00 10:30:00 11:00:00

CN EC EC GB EC

PMI services - index (HSBC) PMI services - index Composite PMI output PMI services - index Retail sales - % mom

Jun Jun F Jun F Jun May

53.5 54.4 54.1 56.5 0.7

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)

0.8 0.3 11.0 1.0 98.0

49.6 55.5 52.5 52.5 210.3

220

53.2 -2.1

53 -2.1

-0.3 0.2 2.3 222 226 5.4

54.4 54.1 57.5 0.1

0.2 2.3 220 230 5.4

Euro Rates Weekly - Greek default fallout? - 26 June 2015

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