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Situation Critical

04.05.2015

The Greek debt drama is now entering a critical phase. Without an immediate breakthrough in debt negotiations the country can go bankrupt as soon as Tuesday May 12th.

Greece announced major changes to its negotiating team a week ago. This together with optimistic statements made by the Prime Minister caused the government bond yields plunge.

An agreement with creditors is still a long way away off and we believe it will be extremely difficult to reach.

Minimal space for maneuvers

Firstly, the EU has nothing to give. If Germany provides concessions it will create a dangerous precedent.

If Greeks are rewarded for voting for Syriza, Syriza-like parties will likely benefit in other crisis-stricken countries such as Spain and Portugal and similar demands can then quickly arise there.

The second problem is that Syriza does not have much scope for maneuvers either. They won the election on a promise to reject austerity policies and cutting public debt.

Fight fire with fire

EU is betting that Syriza will yield when it is pushed hard enough. The reason is that the vast majority of Greeks want to keep the euro.

The problem is that the Syriza party will probably crack and the government will fall if it yields to the EU demands and continues with the austerity policy. The same will happen if the government takes Greece out of the Eurozone.

This has created a dangerous paralysis that the prime minister is now attempting to address by indicating that he will put the outcome of the negotiations to a referendum. This will in effect be a vote for or against the euro.

Time is running out

This brings us to the third problem - time. The Greek negotiators are running out of time and it will be hard to conduct a referendum before the country runs out of money.

Liquidity is already beginning to be extremely tight and on May 12 Greece needs to payback 750 million euros to the IMF. It is far from certain that the country will be able to do this.

When a default becomes the reality, Greece will be forced to shut down the banking sector. The reason is that the banks own large amounts of Greek government bonds and a state bankruptcy will therefore automatically lead to bank failures.

A shutdown of the banking sector may happen earlier if depositors get nervous and decide to withdraw their money.

Those who have booked their holidays in Greece would be well advised to bring cash in case of a complete or partial shutdown of the banking system.

Possible outcomes

It is difficult to predict how the Greek drama will end but we believe there is 40 percent probability of a fiscal bankruptcy and an uncontrolled exit from the Eurozone.

However, we also believe there is a 60 percent chance that Greece will remain in the monetary union. Such a solution is conditional on EU giving Greece an emergency loan so they have more time for negotiations and a referendum.

Marine Harvest

This week we include Marine Harvest into the Dovre portfolio. We believe in a new tightening of salmon prices throughout this year and the next, driven by a low elasticity of the supply side together with a systematically rising demand.

If we are right, last months’ setbacks in the share price represent a buying opportunity.

Dovre portfolio

  • Kongsberg Automotive
  • Avance Gas
  • Aurora LPG
  • Nordic Nanovector
  • Bionor
  • Marine Harvest

In: Marine Harvest

Out: Norwegian Property