The EU will save its banks but abandon the state if Greece rejects austerity in the upcoming vote on 17 June, SEB’s chief strategist Johan Javeus projects in a presentation where he outlines what might lie ahead for the recession-hit country. Recent opinion polls suggest the country will get a pro-austerity government, but the final outcome is far from certain and since Greek law does not allow more polls until the election, Europe will be flying blind for a couple of weeks.

1. What if Greece votes “no to austerity” Save the banks, abandon
on June 17? the state
johan.javeus@seb.se

2. If Greece rejects austerity – EU will save the banks but abandon the
state
Opinion polls suggest a pro bailout government will get a majority. But this is far
from certain and since Greek law does not allow more polls until the election Europe
will be flying blind from now until June 17.
Liquidity crisis. If Greece votes “no to austerity” the country will be cut of from
further EU/IMF funding. Within a very short time (June?) the government will run out
of money as tax payments are already being deferred by nervous tax payers.
Contagion: The big contagion risk arises if Greek banks are allowed to collapse
since that could trigger bank runs in Portugal, Spain and Italy. The Troika owns
almost 80% of the total Greek government debt so a second Greek default on the
government debt is unlikely to cause big problems for the private sector.
Response: Immediate crisis response from the EU/ECB will be focused on
preventing widespread bank runs across Europe. To do this effectively it is likely that
also the Greek banking system will be saved by EU. The Greek state will be left to
cope for itself and the country will face an even deeper economic recession.
2 ccy system? Introduction of a two currency system could be a way forward for
Greece enabling it to devalue while still officially keeping the euro.
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 2

3. Greece on the verge of a bank run
Domestic bank deposits
Bank deposits have fallen sharply over the
past two years. 240 240
According to Bank of Greece the decline in 220 220
deposits have accelerated since the May 6
200 200
elections that resulted in political chaos.
EUR
180 180
Greece is running dangerously close to
suffer a full blown bank run which could very 160 160
well be triggered by a “no to austerity” vote 140 140
on June 17.
120 120
04 06 08 10 12
Liquidity support for Greek banks (estimated)
ECB repos (€79bn): As Greek government bonds are not eligible collateral for lending at the ECB Greek banks
have had limited access to the regular ECB liquidity facilities during the spring.
ELA (€46bn):If a bank is unable to fund itself through the ECB a national central bank can provide Emergency
Liquidity Assistance to local banks. The collateral requirements for these loans are less strict than for regular ECB
repos and decided by the Central Bank of Greece itself.
Target 2 financing (€103bn): By using the EU payment system a country can provide financing to its banks by
building up a payment deficit to the euro system.
New capital (€18bn): As part of the second bail out package Greek banks were recapitalized on May 28 (the first
step of a €45bn recapitalization plan). The banks received EFSF bonds that can be used as collateral to access ECB
liquidity.
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 3

4. Global banks exposure to Greece
At the end of 2011 European banks had a total exposure to Greece of about €70bn. French and
Portuguese banks stand to loose the most if Greece abandons the euro while Spain and Italy have
much less direct exposure. Note the numbers should have decreased further since end 2011 due to the
government debt write down and continued efforts from banks to reduce their Greek exposure.
The big risk from a collapse of the Greek banking system is not the direct losses it would incur on other
EU banks but rather that it could trigger bank runs in other weak EMU countries.
Total bank exposure to Greece per country
80 74.1 EUR bn
69.6
70 0.6% of GDP
60
50
40 1.6% of GDP
34.1
30
20 3.6% of GDP
10.3 8.1
10 6.2
3.4 2.7 1.8 1.7 1.5 0.7 0.7 0.6 0.2 0.1
0 d
ds
Italy
ny
d
ga l
l
pe
en
UK
n
ium
ce
ri a
n
U SA
Tota
erl an
Ir elan
Japa
Spai
erl an
a
Euro
Fran
Swed
Aust
Portu
Ger m
Belg
Swi tz
N eth
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17?
Source: BIS 4

5. Likely counter measures to prevent contagion if Greece votes no to
austerity
The Greek banking sector would find itself in a very dire situation if Greece is cut off from
foreign funding with a likely run on Greek banks. This could easily spread to other
peripheral countries such as Portugal, Spain and Italy.
EU governments response:
Introduce a commonly backed EU deposit guarantee system to prevent bank runs in other
countries. If Greece is also included in this system it would further limit contagion.
Give ESM the ability to support banks with new capital directly or as an alternative lend
earmarked money to Spain, Portugal and Italy to shore up their banks.
Give Spain a emergency loan to shore up its banks.
ECB response:
A new LTRO with perhaps even more flexible collateral requirements
Revival (and possibly large scale up) of the SMP program to by more peripheral bonds
Another rate cut
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 5

6. Save the banks, abandon the state
In the event of a “No to austerity” vote on June 17 there is a fine line between how much
additional help the EU should provide to Greece and to what extent it should just leave
the country to fend for itself.
Save the banks: By saving the Greek banking system the EU can both limit contagion
outside Greece and prevent complete anarchy in the Greek society (as would likely be the
case if people were to see their savings go up in smoke).
Abandon the state: At the same time EU cannot help Greece too much since that might
tempt governments in other crisis struck countries to opt for the same “easy way out” as
Greece. Thus the EU is unlikely to offer any more help to the government to cope with
public deficits.
The Greek economy would face a further large dip in GDP while many companies
would default and unemployment would rise sharply.
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 6

7. Who owns the Greek government debt?
Central government debt
The central Greek government debt amounts to 400 180
€288bn (133% of GDP) 375 170
Since 2010 there has been a huge shift in whom are 350 160
EUR (billions)
Greece’s creditors away from the private sector
% of GDP
325 150
towards the public sector (i.e. EU, IMF and ECB). 300 140
The combined effect of massive official support to 275 130
Greece and the PSI deal has reduced the private and 250 120
other non public holdings of government debt to 225 110
only about 20% of the total. 200 100
EU and ECB now holds more than €200bn (71%) of 06 07 08 09 10 11
Greek government debt, almost 10 times what the EUR bn % of GDP
IMF has lent
Thus at this point it is primarily EU taxpayers Total Central Government debt €288bn
who owns the Greek debt
Others incl
Private sector
60
Greek central government debt EFSF
107
€bn % of total
EFSF 107 37%
IMF
EU (bilateral) 53 18% 23
ECB (SMP) 45 16%
IMF 23 8%
Private sector 60 21%
Total 288 100% ECB (SMP)
45
EU bilateral
53
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 7

8. Without foreign funding Greece risks becoming a failed state
Greece is still running a primary budget deficit
meaning even if the government stopped
payments on its remaining debt it would still have
a shortfall. Government budget balance
According to outgoing PM Papademos the
government could run out of money already in 5.0 5.0
June as nervous tax payers have delayed tax 2.5 2.5
payments until the political situation has become
clearer. 0.0 0.0
-2.5 -2.5
A “No to austerity” vote would result in:
Greece immediately cut off from further -5.0 -5.0
borrowing from EU/IMF.
-7.5 -7.5
Tax payments would come close to a halt as
companies and households would try to hold on -10.0 -10.0
to any money they have.
The government would be unable to pay -12.5 -12.5
pensions, salaries and other benefits. -15.0 -15.0
Many private companies would be unable to pay 02 03 04 05 06 07 08 09 10 11
their creditors and employees.
Economy would quickly revert to barter. Primary balance (excl. interest rate costs)
High risk of Greece turning into a failed state and Total budget balance
with society in chaos.
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 8

9. The case for a parallel currency in Greece
Government IOUs: As the Government is cut off from foreign borrowing and thus unable to pay
pensions and salaries it would instead have to “pay” by giving out IOUs (i.e. a government promise to
pay the owed amount of euros sometime in the future).
An informal market would quickly establish itself where the Greek government IOUs could be
exchanged for real euros at a substantial discount.
Say hello to the “eurodrachma”. The IOUs would effectively begin to function as a parallel
currency to the EUR and could be used within Greece to pay for food and other domestic goods and
services. However, for obvious reasons it would not be accepted by foreigners as payment for
imports.
Experiences from Cuba. The system of parallel currencies is already in place in Cuba which have
two official currencies. The convertible peso (CUC) is worth around 25 times more than the national
peso (CUP). The government pays a part of pensions and salaries in convertible pesos and the rest in
national currency.
Crucial to save the banks. The transition to a 2-ccy system will be much smoother if the EU/IMF
would agree to save the Greek banking system. Avoiding widespread banking defaults would mean
that households and companies would not lose their euro savings and enable the euro to remain a
hard currency used in Greece.
Greece could remain in the EMU. By adopting a two currency system Greece could officially
remain in the Euro zone and gradually, as the economy recovers, revert back to only using the euro.
In reality, introducing the eurodrachma would accomplish the same effect as a traditional
devaluation since it lowers domestic costs and wages.
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 9

10. Polls suggest a pro bailout government would get a majority
Opinion polls estimate that New Democracy and PASOK will together get around 165 seats in the 300-
member parliament, up from 149 today thus allowing them to form a pro-bailout, pro-austerity
government
The smaller parties behind the big 3 have together lost 12 percentage points since the May 6 election
The percentage of those polled that want the country to remain in the Euro zone is still a very high at
85%
Note: the Greek election law prohibits publishing of further polls until the election
Opinion polls* May 6 2012 results
% of votes diff vs May 6 % of votes seats
New Democracy 25.5 6.6 18.9 108
Syriza 23.5 6.7 16.8 52
PASOK 11.9 -1.3 13.2 41
Independent Greeks 6.0 -4.6 10.6 33
Communist Party 5.1 -3.4 8.5 26
Golden Dawn 4.4 -2.6 7 21
Democratic Left 5.2 -0.9 6.1 19
Others 18.4 -0.5 18.9 0
Total 100 300
* average of 5 opinion polls taken on June 1
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 10

11. The Greek economy still in free fall
Percent of GDP
Percent y/y
EUR bn
Balance
Balance
Percent
2012-06-04 | WHAT IF GREECE VOTES “NO TO AUSTERITY” ON JUNE 17? 11

12. Disclaimer
Important: This statement affects your rights
The information in this document has been compiled by SEB
Merchant
Banking, a division of Skandinaviska Enskilda Banken AB (publ)
(“SEB”).
It is produced for private information of recipients and SEB is not
soliciting
any action based upon it. All information has been compiled in good
faith
from sources believed to be reliable. However, no representation or
war-
ranty, expressed or implied, is made with respect to the
completeness or
accuracy of its contents and the information is not to be relied upon
as
authoritative. Recipients are urged to base any investment decisions
upon
such investigations as they deem necessary. To the extent permitted
by
applicable law, no liability whatsoever is accepted for any direct or
consequential loss arising from use of this document or its contents.
Any
presented performance data is un audited. Your attention is drawn to
the
fact that SEB, a member of, or any entity associated with, SEB or its
affiliates, officers, directors, employees or shareholders of such
members
may from time to time have holdings in the securities mentioned
herein.
THIS INFORMATION IS NOT INTENDED TO BE PUBLISHED OR
DIST-
RIBUTED IN THE UNITED STATES.
SEB is incorporated in Stockholm, Sweden, with limited liability.
SEB is regulated by Finansinspektionen (the Swedish Financial
Supervisory Authority). Confidentiality Notice: This information is
confidential and may not be reproduced or redistributed to any
person.