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JP Morgan scenarios for second review, Greece’s participation in ECB’s QE

The decision reached by Eurozone finance ministers in Malta concerning Greece increases the chances of a solution for completing the second review of the Greek programme before May 22, according to a report by J. P. Morgan released on Monday.

The U.S. banking and financial services giant said the decisions appears to have clarified most of the obstacles that were delaying talks for concluding the review and point to a higher possibility of a good outcome for Greece.

J.P. Morgan’s central scenario, to which it gives an 85 pct probability, predicts that the next step will be the return of the institutions’ missions to Greece to finalise the technical details that will support a staff-level agreement (SLA).

If its predictions are correct, the report said, there will be great progress over the next few weeks, while the sequence of events will be the signature of the SLA, passing of the measures agreed by the Greek Parliament and the completion of the review ensuring future disbursements and further details on debt relief measures.

As a part of this positive scenario, J.P. Morgan said, it was also expected that Greece will become eligible for inclusion in the ECB’s quantitative easing programme in the summer.

“We give an 85 pct probability to this development. This is the most positive result for the Greek bond market and we expect that 10-year Greek bonds will have price/yield rations of about 85 euros/5.5-6 pct with this scenario,” the report says.

Even if the worst of the three scenarios it has drawn up should be proved right, J.P. Morgan said that an accident leading to Grexit was extremely unlikely after last Friday’s decisions and that in its medium-term outlook on Greek bonds “the reward for the risk remains attractive.”

It notes that some form of agreement between the International Monetary Fund (IMF) and Germany will be needed regarding more specific commitments on the part of the European creditors for measures to ease Greece’s debt and more sustainable long-term primary surplus targets, with the 3.5 pct of GDP target remaining for only a limited period after 2018. If this happens, the report noted, Greece will be in a good position to conclude an agreement, even before the Eurogroup on May 22.

It gives a 12 pct probability to a “bad result” for Greece, where talks will continue until the deadline for Greece to repay debt installments in July. This could arise if Germany and the IMF are unable to bridge their differences or if some SYRIZA MPs refuse to vote for the measures called for in the agreement, J.P. Morgan said.

Such a stand-off will likely be resolved in mid-June, with the Greek government finally accepting a “take it or leave it” offer to avoid default.

In its third and worst result, to which it gives a 3 pct probability, J. P. Morgan sees the risk of Grexit reappearing with Greece entering a new period of volatility similar to 2015. A new centre-right government could possibly avoid default with the assistance of Europe but the economic repercussion would be dire, the report said.

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