UBS Deeply Worried Greece’s Lenders May Not Give Next Payment

 It’s not only Greeks worrying about the outcome of the May-6 elections. Lenders, investors and banks cannot hide their fears either. However the concerns of Greeks and markets stand diametrically opposite to each other. While more than 60% of Greeks worry they may get another PASOK-Nea Dimocratia government, the money sector fears not only the possibility of an unstable government without these two Greek major parties. They also see with suspicion potential renegotiation demands on the Memorandum of Understanding II. But most of all they get into deep depression Greece may be deprived of second bailout tranches. And that the debt-ridden country would be unable to repay its debts. Or it would bring the euro zone into a rash collapse, while the markets are not able to absorb it.

UBS: Be worried, be very worried about elections in Greece

A central risk factor is the political landscape after the Greek general elections this Sunday, according to a UBS report published today.

According to recent opinion polls, party political support in Greece has fragmented significantly over the last six months or so, with voters appearing to have moved support away from the two major parties (New Democracy and PASOK) in favour of the smaller parties. Many of these advocate the renegotiation of agreements with official sector creditors, a rejection of austerity measures, or even leaving the euro altogether.

Both main parties have campaigned on the idea that they will renegotiate the Memorandum of Understanding (MoU) with the IMF. In UBS’s view, that suggests a degree of liberty they do not have; we think there is little, if any, appetite at the Fund or at the EC to renegotiate the agreement. Rather, the new government’s task will be daunting: €3bn of spending cuts to implement immediately and an additional €12bn to be detailed for 2013-14. Risks have risen around Greece’s ability to implement austerity measures, against a backdrop of increasingly frustrated and impatient official sector lenders.

As a consequence of the above, we see a high risk of a temporary suspension of official sector financing. If Greece does not fulfil its commitments, we think it is entirely possible that the IMF, and in turn the EU, will simply refuse to make the next payment. “However, it is unlikely in our view that payments would stop altogether – rather, they might be postponed until Greece fulfilled its obligations”, UBS notes.

According to the report, this could generate considerable tension, with the Greek government quickly running out of cash and being forced to stop paying salaries and pensions. Social turmoil would almost certainly follow.

The restructuring of Greek debt earlier this year appeared to many people to mark the end of Greece’s ability to upset other European markets. Even a temporary suspension of official sector financing could therefore be very damaging to European markets – as they consider Greece΄s alternatives in the event that official funding were cut off permanently. (capital.gr)