This from Credit Suisse:
• We still think it unlikely that Greece would leave the euro: Greek net foreign liabilities are high at 88% of GDP (rising to c180% if Greece left the euro with a devaluation of c50%); cheap ECB loans are 33% of Greek banks' funding: without this, the loan book might have to fall c20%; a Greek exit could trigger capital flight from peripheral to core Europe, requiring considerable deleveraging in the periphery; the ECB owns cEu50bn of Greek bonds and the EU/IMF have lent Greece Eu53bn; leaving the euro could mean leaving the EU.
• We also think on balance Greece would choose to avoid early debt restructuring, given that: it would only be in a good bargaining position when it runs a primary budget surplus (vs. a 1% deficit this year); Greek banks' annual PPP is equivalent to 3% of loans, thus the longer the restructuring is postponed the less recapitalisation of banks is required; Greece has only a Eu27bn funding shortfall in 2012E.
We acknowledge the attractions of early restructuring as markets look too pessimistic (with CDS implying 50% default vs required c40%) and it is affordable (we estimate a 32% default of Greek, Irish and Portuguese debt would cost cEu200bn, less than one year's worth of pre-provisioning profits of the European banks). We think a default would take the form of lengthening debt maturities (eg. an 8-year extension would reduce NPV by 34%), with regulators allowing banks not to mark to market and without CDS contracts being triggered. We doubt debt restructuring would occur before the Portuguese election or the results of the European bank stress test. EFSF funding could be used to buy back government bonds and interest payments could be reduced.
• Problems in peripheral Europe are not resolved by government default. The two main problems are loss of competitiveness (the need for wages to fall by 2-7%) and high private sector debt to GDP, (220% in Portugal and Spain vs 170% in the US). We stay cautious of peripheral Europe. FCC and Brisa have >50% of sales to peripheral Europe and look expensive on Credit Suisse HOLT®. We believe the issues in peripheral Europe are ultimately manageable as: Spain does not need to default; core Europe realises the cost of not helping peripheral Europe is greater than helping; Germany is growing strongly (creating inflation and reducing the periphery's competitiveness problem). We worry that if the ECB overtightens policy, this would put pressure on the (largely floating rate) excess-leveraged periphery. We remain underweight Continental Europe but long domestic Germany, short peripheral Europe (especially Spain) and believe the euro will weaken further.