Greece: repeat drama plays on politics

• Greece managed to receive all the first-tranche disbursements of its third bailout programme only after extended negotiations and by pushing back on the severest reforms. Nonetheless, during this process the government’s majority in Parliament was halved to just two MPs.
• The country’s creditors have stood firm on key demands such as social security. The required reforms are particularly important politically as they are the final obstacles before the conclusion of the first   programme review and subsequent initiation of debt relief negotiations. Greece’s financing position, broadly secured until the end of H1 16, is likely to exacerbate any policy tensions.
• In turn, we think that Greece has the potential to return to the headlines, this time in a more fragile European political scene. Indeed, we cannot fully rule out the spectre of “Grexit” returning.
• We present three political scenarios and their implications. Our baseline Scenario A is that we are likely to just hear noise, possibly for a protracted period, but we are confident the government will manage the situation. A grand coalition, our Scenario B, and snap elections, Scenario C, would not constitute realistic and effective options, in our opinion. Scenario C would be the most disruptive and is thus less likely, we believe.
• Greece’s macro environment is uncertain and highly dependent on these political/policy developments. However, once uncertainty is out of the way, we think Greece GDP could start growing quite quickly, potentially by 0.4-0.5% q/q. Negative carry over for 2015 implies that even under our baseline scenario of a decent sequential recovery in 2016 from Q2, Greek GDP will only manage close to flat on average this year, in our view.
• Greek bank liquidity is less stressed, but the situation with deposit inflows has yet to normalise. As a result of the banking sector recapitalisation, the average fully loaded CET1 ratio for the Greek banks ranges from 11% to 13%. We believe a large capital cushion will be required to help absorb the likely continuing rise in non-performing loans (NPLs) in 2016.

Barclays

Economic Research