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DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the lines – Bernhard Eschweiler

DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking /
Schlagwort(e): Sonstiges/Sonstiges
Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the
lines – Bernhard Eschweiler

22.09.2011 / 16:50


– Euro debt crisis is escalating and may soon reach a climax

– Euro survival and no short-term defaults are the rational outcomes

– But risk of policy slippage is rising

– Some good news from Ireland

The Euro debt crisis is escalating in many ways. One focal point is Greece
and its negotiations with the Troika over the payment of the next tranche
of the rescue package. A broader and more severe issue is the rapidly
deteriorating situation of European banks. There is a growing sense that
only a big move can save the Euro. The worry is that politics is not able
to deliver because of a lack of will and understanding as well as the
complexities of the political process inside the EU and individual
countries. Game theory is a helpful tool to analyze the situation and
potential outcomes.

Not a prisoners– dilemma

Specifically, game theory can be applied to the decision of individual
countries to stay in the Euro. The Euro treaty excludes the possibility
that a member can be expelled, but individual countries can decide to exit.
In particular, very weak countries like Greece or very strong countries
like Germany may decide that they are better off outside the Euro. Of
course, if Germany decides to leave, the Euro is finished. The same is not
automatically true if Greece were to leave. However, a Greek exit could
trigger financial, economic and political domino effects that could result
in several members leaving and threaten the Euro as a whole.

Thus, the Euro has the best chance of survival if all members remain and
cooperate. The textbook game in which the players fail to cooperate is the
prisoners– dilemma (http://pespmc1.vub.ac.be/PRISDIL.html). So, does the
Euro suffer from the prisoners– dilemma syndrome? The failure of politics
to agree on a solution would suggest so. Still, no matter how bugged down
the situation may appear, two key features of the prisoners–

dilemma are not in place. First, unlike in the prisoners– dilemma, the
Euro members meet and have the ability to negotiate agreements. Second,
the incentives for each country are such that no matter what the others do
it is always better off to stay in the Euro (see box). For Germany, the
cost is not just economic. Unilateral exit would bring down the Euro and
isolate Germany in Europe as well as globally. For Greece, the only reason
to leave would be if the other Euro members would offer it sufficient
financial compensation. In isolation, that may not be so costly for the
rest of the Euro group, given Greece–s small size. However, it would
create an incentive for other weak Euro members to demand the same
treatment and, thus, threaten the Euro as a whole.

A weak country leaving the Euro will trigger default. However, staying in
the Euro is no protection against default. Greece, for example, could
decide to default or the other Euro members could trigger default by not
supporting Greece. Important is also to distinguish between disorderly
default and orderly (cooperative) restructuring. Greece surprising with a
unilateral default is unlikely to please the other Euro members and risks
the withdraw of financial support. The result would be as catastrophic as
leaving the Euro. Thus, Greece has a strong incentive to cooperate. For
the other Euro members, the restructuring of Greek debt is a matter of
timing and not principle. Greece is insolvent. However, restructuring the
debt now could trigger a domino effect that involves more countries and
threatens overall financial stability. Second, early restructuring removes
the pressure for Greece to undergo the necessary fiscal and structural
reforms and creates a precedent for other weak Euro members to follow.
Thus, the other Euro members have an incentive to prevent a Greek default
until market conditions are calmer and Greece has made enough reform
progress. Most likely, that time will coincide with the Troika holding the
majority if not all of Greece–s debt.

The risk of cheating and trembling hands

So what can go wrong if the game is so clear? Two things: First,
so-called cooperative games are vulnerable to cheating; Second, rational
(incentive compatible) outcomes may not be reached because of mistakes, the
so-called trembling hand syndrome.

– After working out a deal with the Euro group, Greece has an incentive
to cheat. The cheating may come more in the form of feet dragging and
negligence, but the cancelation of its visit to Greece shows that the
Troika was not pleased. The problem is that the Euro group has too
much at stake for just letting Greece default.

– The risk of trembling hands is mostly political. For example, the
Greek government toying with the idea to conduct a referendum to gain
more support for its policies could backfire. Another example is the
disagreement within the German government and parliament. Minority
players with different agendas could prevent making the right

Moving from the game back to reality, the next few weeks promise to be
tense. By the time the German parliament ratifies the decisions of the EU
summit, the market will say –thank you and now please double up–. The
resulting tensions could split the already fragile German coalition
government. This may lead to the formation of a new coalition or early
elections. No matter what, uncertainty will rise and swift decisions will
be less likely. Eurobonds will probably come back on the agenda, but the
sheer complexity of required constitutional changes in Germany and all
other Euro/EU members will make their implementation close to impossible.
More likely is a significant increase of EFSF funds and some form of
mandatory bank recapitalization combined with ongoing bond market
interventions by ECB and possibly EFSF.

The grass in Ireland is greener

The deleveraging that much of the Euro area has to undergo is unlikely to
be achieved through nominal adjustments (devaluations and inflation). Even
if the ECB would follow Fed, BoE and BoJ and engage in large-scale
quantitative easing, the banking system is too impaired to pass the money.
Instead, the adjustment will have to be real. That means in particular
restoring competitiveness. Ireland still has much to do to consolidate its
public sector, but it has made huge progress in terms of restoring
competitiveness (largely through unit labor cost reductions). The progress
is visible in the current account turnaround and the drop in bond spreads
(from over 1100 bps over 10-year German Bunds to under 700 bps).


This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 22 September 2011, Silvia Quandt Research GmbH,
Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German
Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439

Publication according to article 5 (4) no. 3 of the German Regulation
concerning the analysis of financial instruments (Finanzanalyseverordnung):

Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
GmbH in 2011 the preceding twelve months
Buys: 99 37
Neutral: 38 1
Avoid: 6 0

Company disclosures

Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz)
in combination with the German regulation concerning the analysis of
financial instruments (Finanzanalyseverordnung) requires an enterprise
preparing a securities analysis to point out possible conflicts of interest
with respect to the company or companies that are the subject of the
analysis. A conflict of interest is presumed to exist, in particular, if an
enterprise preparing a security analysis:

(a) holds more than 5 % of the share capital of the company or companies

(b) has lead managed or co-lead managed a public offering of the
securities of the company or companies in the previous 12 months;

(c) has provided investment banking services for the company or companies
analysed during the last 12 months for which a compensation has been or
will be paid;

(d) is serving as a liquidity provider for the company–s securities by
issuing buy and sell orders;

(e) is party to an agreement with the company or companies that is the
subject of the analysis relating to the production of the recommendation;

(f) or the analyst covering the issue has other significant financial
interests with respect to the company or companies that are the subject of
this analysis, for example holding a seat on the company–s boards.

In this respective analysis the following of the above-mentioned conflicts
of interests exist: none

Silvia Quandt Research GmbH, Silvia Quandt&Cie. AG, and its affiliated
companies regularly hold shares of the analysed company or companies in
their trading portfolios. The views expressed in this analysis reflect the
personal views of the analyst about the subject securities or issuers. No
part of the analyst–s compensation was, is or will be directly or
indirectly tied to the specific recommendations or views expressed in this
analysis. It has not been determined in advance whether and at what
intervals this report will be updated.

Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate
the shares of the companies they cover on an absolute basis using a 6 –
12-month target price. –Buys– assume an upside of more than 10% from the
current price during the following 6 – 12-months. These securities are
expected to out-perform their respective sector indices. Securities with an
expected negative absolute performance of more than 10% and an
under-performance to their respective sector index are rated –avoids–.
Securities where the current share price is within a 10% range of the
sector performance are rated –neutral–. Securities prices used in this
report are closing prices of the day before publication unless a different
date is stated. With regard to unlisted securities median market prices are
used based on various important broker sources (OTC-Market).

Disclaimer This publication has been prepared and published by Silvia
Quandt Research GmbH, a subsidiary of Silvia Quandt&Cie. AG. This
publication is intended solely for distribution to professional and
business customers of Silvia Quandt&Cie. AG. It is not intended to be
distributed to private investors or private customers. Any information in
this report is based on data obtained from publicly available information
and sources considered to be reliable, but no representations or guarantees
are made by Silvia Quandt Research GmbH with regard to the accuracy or
completeness of the data or information contained in this report. The
opinions and estimates contained herein constitute our best judgement at
this date and time, and are subject to change without notice. Prior to this
publication, the analysis has not been communicated to the analysed
companies and changed subsequently. This report is for information purposes
only; it is not intended to be and should not be construed as a
recommendation, offer or solicitation to acquire, or dispose of, any of the
securities mentioned in this report. In compliance with statutory and
regulatory provisions, Silvia Quandt&Cie. AG and Silvia Quandt Research
GmbH have set up effective organisational and administrative arrangements
to prevent and avoid possible conflicts of interests in preparing and
transmitting analyses. These include, in particular, inhouse information
barriers (Chinese walls). These information barriers apply to any
information which is not publicly available and to which any of Silvia
Quandt&Cie. AG and Silvia Quandt Research GmbH or its affiliates may have
access from a business relationship with the issuer. For statutory or
contractual reasons, this information may not be used in an analysis of the
securities and is therefore not included in this report. Silvia Quandt&Cie. AG and Silvia Quandt Research GmbH, its affiliates and/or clients may
conduct or may have conducted transactions for their own account or for the
account of other parties with respect to the securities mentioned in this
report or related investments before the recipient has received this
report. Silvia Quandt&Cie. AG and Silvia Quandt Research GmbH or its
affiliates, its executives, managers and employees may hold shares or
positions, possibly even short sale positions, in securities mentioned in
this report or in related investments. Silvia Quandt&Cie. AG in
particular may provide banking or other advisory services to interested
parties. Neither Silvia Quandt Research GmbH, Silvia Quandt&Cie. AG or
its affiliates nor any of its officers, shareholders or employees accept
any liability for any direct or consequential loss arising from any use of
this publication or its contents. Copyright and database rights protection
exists in this publication and it may not be reproduced, distributed or
published by any person for any purpose without the prior express consent
of Silvia Quandt Research GmbH. All rights reserved. Any investments
referred to herein may involve significant risk, are not necessarily
available in all jurisdictions, may be illiquid and may not be suitable for
all investors. The value of, or income from, any investments referred to
herein may fluctuate and/or be affected by changes in exchange rates. Past
performance is not indicative of future results. Investors should make
their own investment decisions without relying on this publication. Only
investors with sufficient knowledge and experience in financial matters to
evaluate the merits and risks should consider an investment in any issuer
or market discussed herein and other persons should not take any action on
the basis of this publication.

Specific notices of possible conflicts of interest with respect to issuers
or securities forming the subject of this report according to US or English
law: None

This publication is issued in the United Kingdom only to persons described
in Articles 19, 47 and 49 of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2001 and is not intended to be distributed,
directly or indirectly, to any other class of persons (including private
investors). Neither this publication nor any copy of it may be taken or
transmitted into the United States of America or distributed, directly or
indirectly, in the United States of America.

Frankfurt am Main, 22.09.2011

Silvia Quandt Research GmbH
Grüneburgweg 1860322 Frankfurt
Tel: + 49 69 95 92 90 93 -0
Fax: + 49 69 95 92 90 93 – 11

Ende der Corporate News


22.09.2011 Veröffentlichung einer Corporate News/Finanznachricht,übermittelt durch die DGAP – ein Unternehmen der EquityStory AG.
Für den Inhalt der Mitteilung ist der Emittent / Herausgeber

Die DGAP Distributionsservices umfassen gesetzliche Meldepflichten,
Corporate News/Finanznachrichten und Pressemitteilungen.
Medienarchiv unter http://www.dgap-medientreff.de und


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