| Bank deleveraging waves, spike in realized liabilities on sovereign balance sheets, safe haven bids, currency adjustments, seizure of banks’ funding markets - you know the drill by now. Take a deep breath. Here’s how it could get even worse – in pictures, courtesy of Bank of America Merrill Lynch. We will stay mum for now and let you digest these charts.
Deposit outflows for peripheral eurozone countries have barely begun; here''s the story between January 2009 and March 2012:
| Deposit flows for euro zone countries for the period January 2009 to March 2012 |
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| Source: ECB |
Banks’ stock prices have seen darker days:
EU banks are back at lows in P/B terms, but experiences from earlier banking crises suggest they can dip further
| Bank price-to-book in in financial crises |
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| Source: BofA Merrill Lynch Global Research |
Athens has little cash in the attic and is marching towards a financing crunch by the beginning of July without additional EU/IMF funds, according to BoAML.
Here are some in-bunker trading tips:
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- EURUSD, bank equities, and periphery bonds are already at extreme underweights; while they may fall further in the immediate aftermath of an exit, they are probably the most prone to a short squeeze on ECB action.
- Cyclical equities and Emerging market stocks have not responded fully to the growing crisis, in our view; cyclical sectors and growth geared Emerging market indices are prone to selling off sharply if the global growth outlook is seen as compromised.
- Equity volatility in many regions is reacting slowly so far; we note it is still relatively inexpensive to buy options in some regions, notably Asia and the US; examples include HSCEI and Nifty where put option costs are at 6-month lows.
- In the US, technicals in the VIX market could exacerbate the spill over effects from any Greek exit; historically in previous US and European volatilities in European crises, VIX curve flatteners have paid out positively with a probability of over 85%.
- Investors are underweight duration, and despite record low yields, Bunds may not be reflecting the weak growth EU outlook; even with a substantial ECB response the EU growth is likely to remain subdued; previous liquidity interventions have pushed Bunds up along with other assets so, in our view, risks are skewed towards lower German Bund yields in most scenarios.
- Credit market flows are likely to be initially dominated by a flight to safety with German, UK and Scandinavian credits outperforming. Senior financial spreads have scope to tighten sharply on an ECB response, but subordinated bank credits remain vulnerable even in the event of central bank support. "
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Here’s one crumb of comfort – as should be abundantly clear by now, international banks have little direct exposure to the Greek private sector:
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According to the IIP [International Investment Position] data, Greek private sector liabilities to non-domestics amount to €107bn. This seems to square with the BIS data which suggest that foreign banks'' exposure to banks and non-banks in Greece is ca. €73bn (of which the euro zone represents €68bn). The European Banking Authority (EBA) exposure- at-default data collection effort suggests international banks have €71bn of total Greek exposure, of that figure €51bn is at four banks – Credit Agricole, Marfin Popular, Bank of Cyprus, and BCP. There are problems with using the EBA data, the most obvious of which is that it reflects year-end 2010 data. However, we believe it provides a good basis for directional analysis. . "
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| EBA data - exposure at default to corporates, financial institutions, and retail as of YE 2010 |
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