Greece Is The Word: What The Smart Money Thinks? -- Barron's Blog

        By Robert Guy

        Asian markets are up in Tuesday morning trading as the clock ticks down to the European summit on how to deal with a recalcitrant Greece which thinks it can dictate terms with the very nations that provide the funds it needs to survive.

        Stocks in Japan and Australia are enjoying a solid rebound after being hammered on Monday as investors fretted about the fall-out from Greece's No vote, with some investors hoping a face-saving deal can be forged between the two parties. With Greece's provocative finance minister Yanis Varoufakis out of the picture after offering his resignation, it will be interesting to see whether a compromise deal can be struck.

        German Chancellor Angela Merkel raised the pressure on Greek Prime Minister Alexis Tsipras by warning him that "time is running out" to keep Greece in the Eurozone, adding that the last offer made to the Mediterranean nation was a "very generous" one. While France has indicated it is willing to work towards a deal, the final decision lays in the hands of the "troika" and whether they are willing to set a precedent by bending to the demands of recipient nations.

        The problem for European governments is that about three quarters of Greece's debt is held by European governments, with Germany, France and Italy in the firing line. However, DBS notes that as a percentage of GDP, it is smaller countries like Slovenia and Malta that are most exposed.

        While Merkel has been talking tough, DBS also notes that German banks have claims of EUR11 billion in Greece's banks. Merkel's mind is also likely to be focused by the fact that the Bundesbank has warned a Grexit would hurt its profits and its ability to supplement the government's budget.

        While no one knows how it will play out, many banks have taken out the crystal ball to ponder the possibilities.

        Societe Generale, which sees a 65% chance of a Grexit, says avoiding Greece's departure is possible but it will be difficult. Here's how the bank sees it playing out;

        A full formal exit is unlikely to happen in the next few days or weeks. Both sides will try to resume negotiations in the coming days. We expect euro area policymakers to make a statement that places the ball in the court of Athens (ie opening the door to a deal but with strict conditionality attached). If this process fails, we expect both sides to coordinate their actions to manage the exit.

        It is clear that the ECB has no appetite to front run the political process and as long as discussions are ongoing between the Greek administration and the euro area we consider it unlikely that the ECB would fully cut the ELA and Greek banks' access to ECB liquidity facilities. But a request of resolution of some Greek banks seems likely in the meantime, which would put pressure on policymakers to make a decision.

        Credit Suisse continues to think the chances of Greece exiting the Eurozone are one-in-three. Here's the broker spit-balling on how it could possibly all go pear-shaped;

        We see the main mechanisms of contagion being (in order): political (where apart from the FN in France no single populist party has more than 20% of the vote); deposit flight (but the ECB could offset much of the effect of this through very long dated LTROs); economic contagion (Greece is only 1.5% of European GDP but a prolonged crisis would affect both corporate and business confidence); and banking contagion (where we see the risks as limited given that exposure of euro area banks to Greece has fallen by 80%). At least, this crisis should be relatively short lived with July 20 looking like a firm deadline.

        (END) Dow Jones Newswires

        July 06, 2015 21:50 ET (01:50 GMT)

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