UBS Investment Research – UBS Global Credit Navigator

What are the risks?
Two main concerns deter investors from entering the peripheral world – funding
needs of Italy and Spain and the impending restructuring of Greek debt.
In the first two weeks of January,
-Spain has satisfied 20% of its total 2012 funding requirement of €85bn.
– Italy will move to the forefront with approximately €147bn in 2012 redemptions (€26bn in February, €27bn in March).
Our interest rate strategists expect Italy to issue about €9bn in January, €5bn in mid-February
and €9bn in late February. Optically, these amounts do not appear formidable if
market conditions remain stable.
What about Greece? Our economists look for a 70% haircut in a coercive
restructuring where officials will rely on collective action clauses (CACs) to
increase the participation rate. In their opinion, the ECB will likely have to
participate and take losses. While this decision will be politically divisive, they
believe it is necessary to avoid making sovereign debt effectively junior to the
ECB and helping to reduce the debt burden further. In the end, the Greek debt
situation is still not sustainable but it will buy the country some time.
Table 2 highlights the expected timeline for bank recapitalization, which we
expect will be fully supported by the ECB in an effort to “maintain financial
stability.”
Three scenarios for risky assets
“Choosing to be miserable is an option, but not one I recommend “ – Darren L. Johnson
— The base case: spreads trade sideways with a bias to widen
1. Greece receives another aid package
2. EFSF details produce some sponsorship and ECB periodically supports IT & SP bond yields
3. ECB and national governments support bank funding with LTROs & bank debt guarantees
4. Mild European recession increases idiosyncratic defaults but liquidity stems a Lehman-like event
5. Accommodative monetary policy in the US & EM supports global growth
— The bull case: spreads trade back towards 2011 tights
1. Supersized Greek PSI resets the debt clock
2. ECB more aggressively supports sovereign bond yields & bank funding spreads
3. Aggressive policy stimulus led by China fuels EM & US growth
4. New governments win popular support and credibly commit to fiscal targets and integration
— The bear case: spreads trade wider than 2008-09 levels
1. Unexpected financial or sovereign default occurs
2. Credit crunch accelerates, capital markets freeze and defaults snowball
3. European banks pull overseas institutions into turmoil
4. Outlook for global growth is severely downgraded
UBS Investment Research – Macro Keys
Q&A on the Greek debt restructuring…!! 20 Ιανουαριου 2012
1. Is Greece on an IMF programme?
No, it is not.
The IMF adjustment programme launched in April 2010 was formally
terminated in December 2011 with the payment of an €8bn tranche.
2. Will it be indeed “voluntary”?
We doubt it. We think CAC clauses will be imposed. But even if an agreement is reached, we very much doubt that the participation rate
of investors in a “voluntary” haircut will be high…!
3. Will CDS be triggered?
Yes, if CACs are imposed.
If CAC clauses are indeed imposed, the exchange of bonds becomes coercive for a number of investors. This would almost inevitably trigger credit default swaps.
4. Would the restructuring make the Greek situation sustainable?
No.
Sorry, but no is the answer. Even with full repudiation of the Greek debt, the situation would not be sustainable.
Η ΑΛΗΘΕΙΑ δεν ανηκει σε κανεναν ΠΑΡΑ ΜΟΝΟ ΣΤΗ ΓΝΩΣΗ και ΤΗΝ ΛΟΓΙΚΗ…
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