Euro Area Viewpoint It’s finally sunny in Greece

BofA Merrill Lynch Global Research - Jueves, 24 de Abril

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Greece gains market confidence back The very successful recent test of the market by Greece, with the first sovereign bond since the crisis started in 2010, suggests that the country has gained market confidence back. This followed the early achievement of a primary government surplus and current account surplus last year, substantial improvement in programme implementation, political stability, and the recent approval of a very ambitious package of structural reforms by the Greek Parliament, which should soon allow the conclusion of the 5^th programme review. Expectations that Greece will receive a small debt relief (OSI) from official sector loans later this year, and most likely more in future years, have also helped.  

The macro picture has improved, but risks remain 

The successful bond issuance reflects market expectations that Greece will remain on track. Recent data in Greece is in line with our forecast of a small expansion this year (0.3% in 2014). Fiscal over-performance also suggests to us that it should be easier for Greece to meet its fiscal targets looking forward. However, we still see risks. Hard data is failing to keep track with the improvement in soft indicators, while the most recent PMI data has returned to contraction territory. The implementation of the government's ambitious reform agenda is a must to support the recovery and increase long-term potential growth. And political uncertainty could increase ahead of the May EU elections and the February Presidential elections.  

Banks: stronger capital, ROE recovery, but well in the price 

We believe that the latest stress test of Greek banks offers a reasonably conservative assessment of their capital needs. With the covered capital shortfalls, and provided successful execution of capital actions by NBG, we believe that banks are comfortably capitalized to benefit from the Greek recovery. However, in our view, the recovery is reflected in the valuation of Alpha Bank and NBG, while Piraeus looks overvalued at today's levels. Potential upside to our view could come from NPL recoveries or a stronger-than-expected NIM bounce. In our bull case, we do not rule out that banks may start paying dividends at some stage. The main potential downside remains slower-than-expected asset quality improvement. 

Greek covered bonds: waiting for 2015 

In the covered bond space, we have highlighted the value in ETEGA CB since April 2013. The bond remains attractive, in our view, despite a strong rally: 

• It provides good carry relative to other European CBs, TPEIR 5 03/27/17 or Greece's new 5y bond, and the Greek market is much more liquid now.
• The terms of its programme under English law and the characteristics of its cover pool compare well with domestic peers keeping in mind the systemic importance of NBG in Greece.
• Bank managements' clear preference for senior unsecured in terms of new issuance should translate into strong market technicals.

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