BofA Answers The 5 Most Important Questions About The Future Of Greece

Photo: AP/Kostas Tsironis

Angry voters rallying against austerity and unemployment punished incumbents during Greece’s parliamentary elections. Now political leaders are struggling to form a coalition government and many expect another election on June 17.Failure to keep their bailout commitments has cast doubt on Athens’ ability to meet its debt obligations.

Bank of America Merrill Lynch’s AJ Mehra looks at the big picture and tells us just how the political gridlock¬† affects Greece and the rest of Europe.

What's the most immediate concern for Greece?

'Among Greek bondholders, the most immediate concern is whether the Hellenic Republic will pay the €436m redemption in the international law bond that will mature on May 15. The (lack of) repayment for that bond can have far-reaching implications on both markets and the Greek political crisis.'

Source: Bank of America Merrill Lynch

Do we think they will be paying this bond?

'Trading in the May 15 bond has been almost nonexistent in the past couple of days, making it difficult to determine the probability the market assigns to a payment default by Greece on that bond. That said, indicative trading levels before the elections suggest the market likely perceives a probability of default greater than 50%. European economist Laurence Boone thinks the IMF-ECB-EU Troika has provisioned for a buffer to repay these bonds.'

Source: Bank of America Merrill Lynch

How will the markets react if they pay or default on their payment?

'The paradox is that market reaction could be negative regardless of the decision. Not repaying the May 15 bond will trigger a hard default in Greece and long litigations, increasing sovereign risks in the rest of the region. Repaying it could make the current political crisis in Greece worse by strengthening left parties that are calling for a debt payment moratorium.'

Source: Bank of America Merrill Lynch

When will Greece run out of money?

'If no government is in place before June, when the next EU/IMF instalment is due, we estimate Greece will run out of money sometime between the end of June and early July. And at that point, a return to the drachma seems inevitable. Our economists' central scenario is that Greece will have a viable government after the June elections, with a pro European approach. However, the probability of the country being driven to a full blown default and an exit from the euro is non trivial.'

Source: Bank of America Merrill Lynch

If Greece defaults, how will this affect the Euro area?

'Contagion could follow quickly through two channels: the banking sector and the fear of other countries defaulting on their debt. As recent data show, adjustment in Portugal is proving difficult, particularly due to weak growth. Ireland could also be affected, especially in the context of today's slower global growth environment. Contagion would imply that Italian and Spanish yields, already under pressure, could rise further.'

Source: Bank of America Merrill Lynch

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