Cross Asset Research 31 December 2014 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 12 Euro Themes Greece: Political tightrope-walking and market implications • Greece holds its general elections on 25 January 2015. The Syriza party is maintaining its lead, according to the recent polls, but with insufficient support for a majority government. If these polls prove correct, our baseline scenario for Greece envisages a Syriza-led coalition, possibly with some members of the PASOK and/or To Potami parties. However, we do not rule out alternative scenarios, such as a hung parliament, which could call for new general elections in 2015. • The outlook remains fraught, driven entirely by political developments and the opinion polls in the run-up to the election itself. Until we get more clarity in this regard, Greek government bond yields are likely to remain illiquid, subject to volatility, at elevated levels and only for investors with a suitable risk appetite. • Whatever the political outcome, our baseline is that a precautionary programme will likely be negotiated with the “Troika”. Greece’s funding needs for 2015 are c.EUR20bn and its ability to access the markets is still very limited. However, given Syriza’s strong anti-austerity rhetoric and some already implemented structural reforms, programme negotiations will not be easy. We can see the possibility of the troika compromising on a less ambitious fiscal consolidation path if the new Greek government commits to implementing the structural reform agenda, including public administration reforms. • We cannot entirely rule out a scenario in which no agreement is reached with the troika, risking a Greek exit from the EMU. We assign a low probability to this event, as Syriza has stated that it intends to keep the country inside the monetary union. However, with the country already printing a primary surplus and a significant correction to the current account deficit, Greece is in a less uncomfortable position to exit than in the past. • The EFSF is by far the largest lender to Greece. In the hypothetical unilateral debt restructuring scenario (low probability event), we believe that it would not impact the EFSF credit rating owing to its tight relationship with the rating of the guaranteeing euro area member states. This would have no impact on the indebtedness of the guarantors, as EFSF’s guarantors already record their respective shares of EFSF debt in their gross government debt. • While the key driver of our EURUSD forecast for sustained depreciation to 1.07 in Q4 15 is diverging monetary policies, given our expectation for the announcement of QE by the ECB at its January 2015 meeting, we think this political uncertainty should provide another deterrent to EUR ownership. Economics Research Francois Cabau +44 (0)20 3134 3592 francois.cabau@barclays.com Philippe Gudin +33 1 4458 3264 philippe.gudin@barclays.com Antonio Garcia Pascual +44 (0)20 3134 6225 antonio.garciapascual@barclays.com Interest Rates Research Huw Worthington +44 (0)20 7773 1307 huw.worthington@barclays.com Interest Rates Research – Covered Bonds & SSAs Fritz Engelhard +49 69 7161 1725 fritz.engelhard@barclays.com Jussi Harju, CFA +49 69 7161 1781 jussi.harju@barclays.com FX Research Hamish Pepper + 44 (0)20 7773 0853 hamish.pepper@barclays.com Nikolaos Sgouropoulos +44 (0)20 3555 1578 nikolaos.sgouropoulos@barclays.com www.barclays.com