Morgan Stanley: Worries on Greece are starting to dissipate

Greece’s 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 stabilised, according to economists at Morgan Stanley.

“The competitiveness gap is closing. With unit labour 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. We expect Greece to reach a primary budget surplus this year and maintain it thereafter,” the bank said.

Meanwhile, contagion risks from Cyprus appear limited. The main sources of uncertainty are domestic politics and the ongoing Troika review of the Greek programme.

While there’s some room for manoeuvre, the government’s ability to stay the course will continue to be widely watched by investors over time.

“We find 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,” the bank added.

Downside would be only in the case of a euro exit or a potential second restructuring with the private and the official sectors taking a 60% principal reduction.


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