Greece is too big too fail.

1. KBank Capital Markets Perspectives 18 May 2012
Greece is too big to fail
EUR/USD
Parliamentary election in Greece failed to select a new coalition 1.34
government. A new election is expected to be on June 17th amid growing
tension that Greece might default and leave the eurozone 1.33
1.32
Should Greece leave the eurozone or continue its austerity package and
how could they affect the volatility and direction of the USD/THB? 1.31
1.30
Greece is unlikely to leave the eurozone and there is no rule that other
eurozone members can kick Greece out. 1.29
1.28
If the ECB stops supporting Greece as Greece chooses not to continue
its austerity package, Greece will have no choice but to default…no 1.27
money coming in, no money going out. It’s going to be a game of chicken 1.26
between the new Greece’s leader and the European creditors. 8-Apr 12-Apr 16-Apr 20-Apr 24-Apr 28-Apr 2-May 6-May 10-May 14-May 18-May
During uncertainty period until at least the next parliamentary election,
we are likely to see higher volatility in the FX market. The USD/THB
could rise to 32.60 within the next coming weeks if the tension about
Greece’s exit and default grows. Amonthep Chawla, Ph.D.
However, the eurozone will eventually come up with plans to inject more amonthep.c@kasikornbank.com
liquidity to Greece and allow Greece to remain in the eurozone. Thus, the
USD/THB will fall when the financial chaos is over.
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1

2. Review of Greek drama
April-May 2010: Greece agreed to introduce a EUR24bn austerity Eurozone’s debt crisis is not over
package in exchange for the first bailout amounted EUR110bn from the % GDP
IMF and the eurozone. Market was panic for fear that Greece would 180
default its debt amid growing political tension after riots in Athens. 160
140
October 2010: Greece planned to cut fiscal deficit to 7% of GDP. 120
100
June 2011: Greece agreed to EUR6.4bn additional budget cut. 80
60
July 2011: Greece planned to arrange a bond swap or roll-over some
40
Greek government debt with a contribution from the private sector. 20
0
October 2011: EU summit agreed on a 50% write-off of the Greek
Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16
government’s debt with additional loan to restructure banks in the
eurozone and increase capacity of the European Financial Stability Germany Greece Italy Portugal Spain
Index=100 on Jan 06
Facility (EFSF). Stock markets in Europe
160
November 2011: Greece’s PM planned to hold a referendum to decide
140
whether to accept the new bailout package, yet the plan was abandoned
within a week. EU finance commissioner demanded signatures to a 120
written acceptance of the terms of Greek rescue package. 100
March 2012: Greece managed to get private sector investors (PSI) to 80
agree on the swap plan to write-off large percentage of Greek government 60
debt, extend bond maturity and lower interest rate. 40
May 2012: Parliamentary election failed to select a new coalition Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12
government. A new election is expected to be on June 17th amid growing
FTSE 100 Index DAX Index CAC Index
tension that Greece might default and leave the eurozone.
2

3. Political change in Greece
Stock markets declined while investors turned into risk-off mode and Greece’s prominent leader who opposes austerity
increase demand for the US dollar after the recent parliamentary
election in Greece showed that no party could lead to form a coalition
government.
The election results showed that Greek people demanded changes. Alexis Tsipras
They punished the previous government for introducing the austerity SYRIZA, Coalition of
measures amid growing unemployment rate and continual decline in the Radical Left
country’s GDP.
52 seats, +39
Greek increased their votes for the parties that opposed austerity with
plans to create job and generate growth.
Political change led to an uncertainty whether Greece would not honor
its agreement on the austerity in exchange for the bailout and bond %y oy
Economic recession in Europe
swap in March. 3
2
Investors were seen to increase their concern whether Greece would 1
default its debt, which could lead to an exit from the euro membership 0
and cause the financial panic in Europe. -1
Greece is running out of money to pay salary of the government official -2
as the government does not have enough tax revenue to pay for all its -3
expenses unless additional fund is provided by the eurozone. -4
-5
Should Greece leave the eurozone or continue its austerity -6
package? How could they affect the volatility and direction of the France Germany Ireland UK Italy Spain Portugal Greece
USD/THB?
2011 2012 2013
3

4. Greece is likely to stay amid high cost of exit
Greece is unlikely to leave the eurozone. And there is no rule that other Greece’s current account
16,000 -60,000
eurozone members can kick Greece out. 14,000
-50,000
Despite appealing option that Greece could leave the euro area and 12,000
-40,000
adopt its old currency for supporting exports and tourism, the sharp 10,000
depreciation of the exchange rate is going to lead to economic turmoil 8,000 -30,000
and could be more pains than following austerity package and 6,000
-20,000
remaining inside the eurozone. 4,000
-10,000
2,000
Inflation is likely to go higher with depreciation, which will be more
0 0
difficult for Greece to control its macroeconomic stability.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The financial system is going to collapse as banks are likely to be short
of liquidity while debt denominated in the euro currency is going to rise. Current Account: Serv ices: Trav el (left, USD mn) Current Account (right, USD mn)
Greece’s government debt denominated in the euro currency is also Millions Greece relies on European tourists
18
going to rise, affecting the ability of Greece to pay back its debt. 16
14
The scenario is full of pains and reminds us about the time of Asian 12
financial crisis in 1997. Other eurozone members would not let Greece 10
leave for fear that financial crisis in Greece will be contagious to other 8
6
eurozone members. Investors are likely to speculate that other PIIGS 4
members are going to leave as well, causing bank run and capital flight 2
from the region. 0
2005 2006 2007 2008 2009 2010 2011 (Jan-
Thus, having Greece in the eurozone would be a better option. Sep)
However, how long can the ECB keep injecting money to Greece in the
case that Greece is slowing down its austerity plan. Visitor Arriv als: Europe Visitor Arriv als: non-Europe
4

5. Default is Greece’s last card
Tonnes
If the ECB stops supporting Greece as Greece chooses not to continue its Gold reserve
9,000
austerity package, Greece will have no choice but to default…no money 8,000
coming in, no money going out. 7,000
6,000
Greece is likely to cut spending in areas that do not affect welfare of its 5,000
people much, such as IT, infrastructure, defense and other budget apart 4,000
from socio-economic programs. 3,000
2,000
Greek government can collect more taxes from the rich while it could get 1,000
rid of tax evasion and corruption. 0
India
Austria
Portugal
IMF
Italy
Netherlands
France
China
Switzerland
Russia
Japan
Venezuela
Saudi Arabia
Spain
Algeria
US
ECB
UK
Lebanon
Thailand
Philippines
Belgium
Taiwan
Germany
Turkey
Greece may choose to nationalize banks to increase lending in certain
industries so as to stimulate economic growth. The goal is to generate
higher economic growth, reduce unemployment and eventually pay back
loans. Without growth, the economy cannot do anything. % Unemployment rate in Europe
25
Greece can sell gold and other reserve for financing its spending, which is
likely to cause high volatility in the FX market as well. 20
Of course, it is likely to be painful for Greece as its assets will be
liquidated and it is likely to solve financial problem only temporarily. 15
Greece will eventually need to come back to the capital market when it is 10
running out of money and needs to finance its economy. Greece’s creditor
also knows that and will likely to push Greece hard to make Greece honor 5
its agreement on the austerity package. Jan-06 Jan-08 Jan-10 Jan-12
It’s going to be a game of chicken between the new Greece’s leader
Greece Spain Germany France Italy
and the European creditors.
5

6. What’s next for the USD/THB?
As Greek drama is still on going, we do not think that Greece will leave the Foreign Foreign position (cumulative since 2005) andand stock index
position (cumulative since 2005) stock index
eurozone as the cost of exit is likely to be higher than the cost of staying 9,000 1,300
within the euro area. 8,000 1,200
7,000 1,100
Greece is likely to negotiate with the European creditors to ease the austerity 6,000
1,000
and allow Greece to inject more stimulus package to boost its economy. 5,000
900
800
The creditors are likely to abide by Greece again and again for fear that 4,000
700
Greece’s default would cause financial turmoil in the eurozone. 3,000 600
2,000 500
Greece is too big to fail as its default and exit from the eurozone could cause 1,000 400
contagion to other members, which could be compared to the cases of Jan-09 May -09 Sep-09 Jan-10 May -10 Sep-10 Jan-11 May -11 Sep-11 Jan-12 May -12
Lehman and Asian financial crisis.
Foreign holding (USD mn, left ax is) SET Index (right ax is)
However, Greece cannot get away easily. Political changes and frustration
among eurozone members could pressure Greece to reduce its deficit. SET index and the USD/THB
1250 30
During uncertainty period until after the next parliamentary election, we are
likely to see higher volatility in the FX market. 1200
30.5
The USD/THB could rise to 32.60 within the next coming weeks if the tension 1150
about Greece’s exit and default grows. 31
1100
However, the eurozone will eventually come up with plans to inject more
liquidity to Greece and allow Greece to remain in the eurozone. 31.5
1050
Thus, the USD/THB is likely to fall after Greece reached agreement with its
1000 32
creditors. The market will turn to risk-on mode again and capital flows are
Jan-12 Feb-12 Mar-12 Apr-12 May -12
likely to come back to Asia where the rates of returns are higher than the
ones in the West. SET Index (left) USD/THB (right, inv erted)
6

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