Last updated: 08:51 / Friday, 5 April 2013
Morgan Stanley Research

Greece is Trading at Recovery Value

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Greece is Trading at Recovery Value
  • “With unit labor costs likely to fall further, the incentive for Greece to exit the Eurozone to boost competitiveness via a weaker exchange rate is no longer there”

According to a report released by Morgan Stanley this week, the brokerage firm is more constructive on Greece than consensus expectations. “A recovery hasn’t started yet, but soft data are becoming less bad, as the shocks that hit the Greek economy – including euro exit worries – are starting to dissipate, and bank deposit flows now look fully stabilized”.

Morgan Stanley points out that the competitiveness gap is closing. “With unit labor costs likely to fall further, the incentive for Greece to exit the Eurozone to boost competitiveness via a weaker exchange rate is no longer there,” points out the research. Morgan Stanley expects Greece to reach a primary budget surplus this year and maintain it thereafter.

"We expect the GGB strip to reach 52.5% by year-end. We also see valuations higher in most scenarios of second restructuring”

They also emphasize that contagion risks from Cyprus appear limited. “The main sources of uncertainty are domestic politics and the ongoing Troika review of the Greek program. While there’s some room for maneuver, the government’s ability to stay the course will continue to be widely watched by investors over time”.

Morgan Stanley finds the risk/reward particularly attractive in GGBs. “Current valuations are lower than in most of the medium-term scenarios we laid out. In fact, we expect the GGB strip to reach 52.5% by year-end. We also see valuations higher in most scenarios of second restructuring”.

Morgan Stanley’s economists, Daniele Antonucci and Samar Kazranian, see downside only in the case of a euro exit (a remote tail risk, in their view) or a potential second restructuring with the private and the official sectors taking a 60% principal reduction  which they consider would be a quite a harsh scenario for the private sector.

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