July 02, 2015

Greek default

Greece has defaulted on its foreign debt liabilities. Given the severe shortfall of EUR liquidity, rejection of the EU proposals may eventually make Athens return to printing drachma.

Should it be the case, the implications outside Greece will likely be the following:

         Slower long-run growth in the EU. Although contagion effects should be limited, an exit of Greece from the euro area would still hamper moods inside the currency union, leading to increased risk-aversiveness and, ultimately, slower output growth. Countries like Portugal, Spain and even Italy will likely be primary victims of this shift in the market sentiment.

         Weaker EUR (although we assume the impact of Grexit on the single currency will be rather short-lived). Other CEE currencies, including the UAH, may therefore strengthen against the EUR.

         Ukraines decreased competitiveness on the EU markets, which would be stipulated by both lower demand for Ukrainian products across the eurozone and a weaker EUR. As Europe is Ukraines primary export market (EU accounted for 32.6% of our total exports in Jan-May 2015), this would also suggest decreased FX proceeds into Ukraine and increased pressure on the UAH.  

         Other immediate effects of the Grexit will likely be limited. This is however subject to no black swans (unexpected events and downside surprises). In the worst case scenario, an exit of Greece may be a preview to a much bigger shock, given a subsequent sell-off of the peripheral EU and a possible deposit runs across the South-European banks.


Ukraine's potential default

Yesterday, Ukraine MinFin reported certain progress on its restructuring talks with creditors. The parties had finally agreed on confidentiality arrangements, which will now allow them to get involved in direct negotiations (said to start next week).

Although our basic scenario provides that a comprehensive Ukraine-creditor agreement is reached in 3Q this year, below we describe the likely consequences of Ukraines defaulting on its foreign debt liabilities:

         No impact on the local government debt markets. According to the NBU, share of non-residents in the aggregate OVDP portfolio is tiny 4.7% (UAH 23bn) and further capital withdrawals by foreigners have been virtually cancelled by the central bank capital controls. Private capital outflows amounted to USD 13.6bn in Jan 2014-Apr 2015. And as the capital run continues Ukraine stays totally reliant on official bailout inflows from abroad. Another important point is that Ukraines local debt issues do not contain a cross-default provision relating to the governments foreign debt placements.

         Limited impact on the USD/UAH. Although some volatility is possible, this is unlikely to result in a cheaper UAH, in our view, due to the harsh central bank controls on the market (e.g. the central banks legal ability to eliminate bids for FX on a selective basis).

         Limited impact on Ukraines corporate Eurobonds. Most of the corporate Eurobond issues have already been restructured / reprofiled. Eurobonds of Privatbank (Ukraines largest banking institution) are the only exception. As the bank has recently announced the restructuring terms of its issues due in late 2015 and 2016, these may have to be improved.

Cross-default and CDS triggered. As we see it, the restructuring effort covers Ukraines all sovereign and sovereign-guaranteed foreign debt issues (est. USD 19bn in total), all of which will be subject to a cross-default provision. Faced with a series of claims to accelerate repayments, Ukraine will likely opt to stand firm on its previous terms (one of which could be a 40% haircut), as long as the IMF-led bailout is continued. We also believe the USD 3bn bond held by Russias National Wealth Fund will be repaid in full and on schedule, as this would remove any controversies on the way of further IMF funding. 


For more: alert020715.pdf