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To: Dennis Roth who wrote (157060)	9/16/2011 9:56:47 AM
From: Dennis Roth	2 Recommendations Respond to of 206089

OT: What Happens If Greece Defaults? 10 pages Link: ir.citi.com Rising Risks of Disorderly Default or a Greek Exit From The EU: This is not our base case but the risks are now sufficient to merit attention. If there was a default, widespread public and private sector involvement through debt write-downs seem inevitable. We estimate 65-80% of face value, but this could rise to 90-100% in time as the Greek economy slows further. Tier 2 Spreads Would Also Likely Widen Significantly: Italy, Spain and Belgium are not insolvent; they suffer from impaired liquidity and risk aversion. Even so, a default by an EMU sovereign would be highly likely to escalate the risk of huge losses among their banking sectors through peripheral debt write-downs. Even Tier 1 countries are vulnerable, and with the banking sector under threat and funding drying up, we would expect economic growth in most of Europe to slowdown. A Greek Exit From The EU Would Be Very Costly Indeed: The new currency would collapse, we think by 40-50%, triggering a run on the banks and a collapse of the banking system, deep recession and possibly hyperinflation. For the rest of Europe the implications would also be severe. The first key point is that a taboo will have been broken. We would expect significant contagion in spreads, falling confidence, strained liquidity and a sharply appreciating Euro (given reduced default risk) that would damage competitiveness. When Could Such An Event Happen: A theoretical Greek default or EMU exit could happen as early as October, but we see early 2012 as more likely. Mark Schofield ==== European Portfolio Strategist — Crisis Resolution 15 September 2011 ¦ 32 pages Link: ir.citi.com First page: Crisis refresher — EM sovereign and financial crises see equities fall by between 50% and 90%. Debt default and currency collapse are also key components. Europe as EM crisis — EM crises stem from borrowing in a foreign currency. The periphery of Europe has borrowed in someone else's currency, the core’s. Greece already there — Greek equities are down 70% from late 2009 highs. The rest of Europe has not fully priced in contagion risk, being down 20%. Contagion risk — While Greece is insolvent, how and when it defaults will materially influence the rest of Europe. We back orderly but the risk of disorderly default is rising. Lows before highs — Financial markets are the unifying force on uncoordinated policy makers. By pricing contagion policy action is precipitated, worst case avoided. No silver bullet — While we expect the worst to be avoided this does not mean the good times roll. In the low growth world that follows we back quality and growth.