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Nomura on Greek Debt 27 10 11

Nomura on Greek Debt 27 10 11

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MGM Mirage
Credit Research | United States
 
Euro area Comment
Nomura Global Economics
Europe
Nomura International plcSee Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures
27 OCTOBER 2011
EU Summit: Progress made on EFSF and Greek debt PSI
Contributing AnalystsLaurent Bilke Dimitris Drakopoulos Nick Firoozye Jens Sondergaard
+44 20 710 30022 +44 20 710 33611 +44 20 710 25846 +44 20 710 21969-
 A late-night deal with banks and insurance companies appears to secure a 50% loss on Greek debt holdings.
-
European leaders agreed last night on plans to recapitalize banks and leverage the EFSF.
 
- Total firepower of the leveraged EFSF will only be clear once finance ministers complete their work by November.
The European leaders tonight announced a number of policy measures intended to address the sovereign debtcrisis in the euro area. Our take is that the outcome is marginally better than anticipated on the EFSF, in line withrather low expectations on banking sector recapitalisation, but better than expected regarding the Greek debt relief.We had very low expectations for these meetings, but on several accounts, the announcements appear better thanthe 21 July package, which fell short of bringing significant debt relief to Greece or ring-fencing Spain and Italy.Some important step towards addressing Greek debt sustainability could have been made and a few criticalquestions for financial markets remain in the background.
What was actually announced?
-
On Greek PSI,
the leaders have apparently struck a deal with private banks and insurers late in the nightto accept a 50% loss on holdings of Greek government bonds, with a objective to lower Greece’s debt-to-GDP ratio to 120% by 2020, as suggested by a leaked IMF debt sustainability report last Friday. Thiscorresponds to a 100bn reduction, and is supposed to occur in January. Euro area member states areexpected to contribute up to EUR30bn to the PSI, and a new EU-IMF multiannual programme, which willfinance up to 100bn, is expected to be put in place by the end of the year.- The EU-27 heads of state agreed that
EU
 
banks
should have 9% core capital level by June 2012, withspecific plans – agreed with the national supervisors - for achieving that goal. The recapitalization plansshould take into account sovereign write-downs (based on end-Q3 2011 market prices) and must not leadto excessive deleveraging. Separately, the European Banking Authority announced that this would amountto a capital injection of €106bn. National governments are allowed to recapitalize banks, but only if thebanks cannot find the capital via private sources. EFSF resources should be used only as a last resort. EUleaders also called for a plan to guarantee bank liabilities in an effort to support banks’ access to termfunding.- On increasing the firepower of the
EFSF
, the euro area heads of state announced plans to leverage up theEFSF “several fold” by opting for the two model approach – the credit enhancement option and the specialpurpose vehicle (SPV) option – both being deployed simultaneously. The IMF could potentially play a rolein terms of the total resources available. The Eurogroup is to finalize the precise details in November.- The euro area heads of state welcomed the steps
Spain
took to reduce its budget deficit, restructure thebanking sector, implement structural reform and adopt a constitutional balanced budget amendment. Butthe euro area leaders also called for more measures as well as further structural reforms. Italy also madenew commitments to structural reform.- The leaders agreed that further economic integration is needed for the “completion” of the economic andmonetary union. More economic governance, which may involve limited Treaty changes, is beingconsidered.
The positive elements in the package:
 
Nomura| Euro area Comment 27 October 2011 2
Some elements of the package are actually better than we anticipated last week.- We had anticipated that the Greek debt PSI was moving toward a 50% haircut, but did not expect a deal tobe struck with the private sector and certainly not at this stage. It remains to be seen exactly whoparticipates, whether CDS will be triggered in the event that participation does not reach a required leveland whether the 120% target by 2020 is realistic (but it seems to be as first glance), but this is decisiveprogress which we did not think would come at this stage.- On the credit enhancement option, the guarantee mechanism for new issuance by Spain and Italy will bestrippable, so the guarantee certificates can trade freely from the BTPs and SPGBs, thus reducing thepossibility of a two tier bond market while also likely reducing the cost of default protection. The secondoption, the SPV, would seek funds from outside investors – possibly the IMF – offering credit enhancementfrom the EFSF to purchase exiting bonds issued by Spain and Italy. While the SPV option could somewhattemper concerns that the guarantee mechanism would result in a two-tier bond market, it will certainly noteliminate it, as only a very large SPV could do that (the outstanding of Italian and Spanish bonds totalapproximately €2.5trn).- The political hurdles to get the enhanced EFSF up and running appear to have lessened compared to the21 July package, when the August holiday break and difficult discussion regarding the size increase of theEFSF implied that any package would take months to come into force. The German Bundestag alreadyconsulted and agreed upon today’s EFSF measures. This pre-emptive consultation process – initiallythought to be an obstacle to today’s decision – actually cleared the way for a deal.- Today’s announcement paves the way for an actual increase in the total firepower of the EFSF through“leverage”. Depending on the investor take-up of the SPV option and the degree of credit enhancement, wethink it is possible for the EFSF’s firepower to reach €1trn.
The negative elements in the package:
- As we expected, however, the announcement falls short of details on the actual firepower increase of theEFSF. This will be unknown until there is clarity regarding who will invest in the SPV; be it the IMF (if that ispossible at all) or some SWF. Already, Brazil has declared it had no intention of participating. In any case,it cannot be taken for granted that seeing more individual countries joining the dance to rescue theEuropean periphery will stabilise the framework.- Another important drawback of the plan is that it offers no clarification regarding the continued involvementof the ECB in secondary market operations. Actually, if anything, more questions are raised by theBundestag call for the ECB to end its bond buying programme once the enhanced EFSF is up and running.If bond buying by the EFSF SPV facility is meant as an alternative to the ECB’s SMP, then we doubtwhether it can perform the tasks as efficiently as the central bank. That’s a concern. But in any case, thisissue will not be cleared for several weeks.- The bank recapitalization plans were in line with our expectations for a slow strategy with a June 2012deadline and that capital would be met by first by private, then public, and finally by EFSF funds. The ideaof guaranteeing bank funding is an interesting new idea that has potential to unblock the bank fundingmarkets. But whether this has a beneficial effect depends on the precise details on how it will be done. TheEuropean Commission has been “urgently” tasked to explore options.
The bottom line:
Overall, we acknowledge that some important missing parts from the July agreement have been included here (e.g.,lowering Greece’s debt burden as well as ring-fencing Italy and Spain). Last night’s agreement alone will probablynot resolve the euro area issues once for all, but if the details of the new PSI are confirmed in the coming weeks,this marks an important moment in the resolution of the crisis. Most crucially now, we will see whether a CDStrigger is required.
Market implications:
The market take is likely to be positive, in our view, given that expectations were generally very low ahead of themeeting. Even though the outcome falls well short of the “leverage” expectations that initially triggered the rally inrisk sentiment about three weeks ago, the PSI part is better than expected, if indeed a substantial voluntary dealhas been reached.
 
Nomura| Euro area Comment 27 October 2011 3
Disclosure Appendix A1ANALYST CERTIFICATIONS
We, Laurent Bilke, Dimitris Drakopoulos, Nick Firoozye and Jens Sondergaard hereby certify (1) that the views expressed in this reportaccurately reflect our personal views about any or all of the subject securities or issuers referred to in this report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., NomuraInternational plc or any other Nomura Group company.
IMPORTANT DISCLOSURES
 
Online availability of research and additional conflict-of-interest disclosures
 Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG andTHOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS andBLOOMBERG.Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page
or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email 
for technical assistance.The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities.Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions oncommunications with covered companies, public appearances, and trading securities held by a research analyst account.
 
ADDITIONAL DISCLOSURES REQUIRED IN THE U.S.
 Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in relatedderivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc Personnel: The fixedincome research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel inconnection with obtaining liquidity and pricing information for their respective coverage universe
.
 
Valuation Methodology - Global Strategy
 A “Relative Value” based recommendation is the principal approach used by Nomura’s Fixed Income Strategists / Analysts when they make“Buy” (Long) “Hold” and “Sell” (Short) recommendations to clients. These recommendations use a valuation methodology that identifies relativevalue based on:a) Opportunistic spread differences between the appropriate benchmark and the security or the financial instrument,b) Divergence between a country’s underlying macro or micro-economic fundamentals and its currency’s value andc) Technical factors such as supply and demand flows in the market that may temporarily distort valuations when compared to an equilibriumpriced solely on fundamental factors.In addition, a “Buy” (Long) or “Sell” (Short) recommendation on an individual security or financial instrument is intended to convey Nomura’sbelief that the price/spread on the security in question is expected to outperform (underperform) similarly structured securities over a three totwelve-month time period. This outperformance (underperformance) can be the result of several factors, including but not limited to: creditfundamentals, macro/micro economic factors, unexpected trading activity or an unexpected upgrade (downgrade) by a major rating agency.
 
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This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or,with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1herein or identified elsewhere in the document. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include:Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York,US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information onNomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet athttp://dis.kofia.or.kr ); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Capital Nomura Securities Public Company Limited (‘CNS’), Thailand; Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; Nomura International (HongKong) Ltd., Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India(Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 224037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX:INE261299034); Banque Nomura France (‘BNF’), regulated by the Autorité des marches financiers and the Autorité de Contrôle Prudentiel;NIplc, Dubai Branch (‘NIplc, Dubai’); NIplc, Madrid Branch (‘NIplc, Madrid’) and NIplc, Italian Branch (‘NIplc, Italy’).This material is: (i) for your private information, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or asolicitation of an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) based upon information fromsources that we consider reliable, but has not been independently verified by Nomura Group.Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantableand does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extentpermissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use,misuse, or distribution of this information.Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, includingthe opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document.Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group.Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. Nomura Group does not provide tax advice.Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal,agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivativeinstruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidityprovider (as defined within Financial Services Authority (‘FSA’) rules in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this willbe separately disclosed within the specific issuer disclosures.This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s.Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party.Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, andare not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such

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