Thursday, March 4, 2010

Greece’s New Austerity Measures Worst Case Scenario [citibank capital markets] $EWG

•Another Round• of Tightening was announced yesterday for an additional €4.8bn or c2% of Greek GDP – in order to meet the target of 8.7% of GDP in 2010 (c400bp reduction). So far the three set of measures announced by the government for
2010 total c6.5% of GDP – with the latest cuts being at the upper end of the range of the EU request of 1.5-2.0% of GDP. They are harder measures – including VAT and consumption tax hikes and at last a direct cut in public wages (c4%).

• Next for the Economy – is Greece’s efforts to raise the €20-25bn that it needs to meet heavy redemptions in April-May and to fund the deficit. Greek bond spreads are now at c285bp (peak at 396bp) but the government has suggested that it does
not want to rush and raise debt at current yields (c6%). Furthermore, we believe the bond market will first need an audited (EU) number on the Greek debt (€272bn at the end of ’09 based on SGP) considering recent reports on offbalance sheet debt. The window for EU and even IMF bailout is open and such expectations are high – especially after the new austerity program.

• Our Worst Case Scenario for Equity Market has Crystallized – Back in January we forecast a 30% chance that Greece would fail to deliver on its budget pledge and struggle with its €54bn bond issuance program, forcing it to take harder economic measures, and leading to significant and prolonged economic weakness. The latter may still be ahead of us and we believe the government's GDP forecast of - 0.3% for 2010 will prove too optimistic (we were at -1.3% before the new measures).

• Is the Worst Case Scenario Discounted? - Since January we have cut our market 2010E EPS estimates by c20% (now expect 10% decline) and still see further downside risks to that. Greece is now on a P/E of 12x 2010E – in line with the rest of Europe. Despite this, the Greek equity market fell by only 2% (8% ytd) and c4% relative to Europe (6%), helped by the recent 8%,bailout-hope driven, rally


Greece’s New Austerity Measures

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