GLOBAL EQUITY STRATEGY Report: “Greece: what if?” – Prefer Indonesia! - Credit Suisse

The perception from Europe, it is probably cheaper to bail-out Greece, rather than let it defaulting that could trigger a domino effect to Portugal, then Ireland, then Spanish, referring to Lehman Brothers domino effect in US in 2008. Figure 56 page 35 “Country risk table” shows Indonesia private sector credit is much better at 29% Private Debt to GDP, compared to 116% Greece, 228% Portugal, 311% Ireland and 223% Spain, In addition to Government Debt to GDP for Indonesia 31%, compared to 157% Greece, 111% Portugal, 120% Ireland and 74% Spain (Figure 10 page 7). BRIC markets Private + Government Debt are also higher than Indonesia (29%+31%), with Brazil (59%+59%),India (65%+70%) and China (131%+18%), with exception Russia (42%+8%).

Indonesia Economics growth, fiscal and Debt-to-GDP remains among the best in the world! Robert Prior-Wandesforde is currently forecasting Indonesia Economics 2011F-12F Real GDP 6.0-5.5%, GDP per capita US$3,630-4,150, year-end CPI 6.0-6.0%, average CPI 5.8%-6.0%, year-end IDR8,250-8,100/US$, average IDR8,485-8,175/US$, and year-end Overnight BI rate 7.50-7.50% respectively. Teddy Oetomo is forecasting 9% upside to end-2011F JCI index target 4,150pts (16x 2011F PER) with Top-picks remain BMRI, BBRI, INDF & TLKM. As Upside Case, anticipating Land-reform bill to be passed late 2011 or 1H12 (Teddy believes 60% probability) to increase Investment-to-GDP for 2011F-2015F from currently circa 25%, Teddy is recommending ASII, GGRM & INDF in scenario of moderate-to-soft investment growth, and is recommending BMRI, BBNI, UNTR & SMGR in scenario of rapid investment growth.

- Andrew Garthwaite (Report attached): There are three inter-connected problems in peripheral Europe: a) most serious, a loss of competitiveness (ex Ireland) that we think requires more wage deflation than the economic consensus forecasts; b) excessive private sector debt (at c230% of GDP in Portugal and Spain, cf to 160% of GDP in US); and c) high public debt, where a haircut of 36%, 25% and 32% is probably needed in Greece, Portugal and Ireland (but CDS are now more than pricing this in).

- Our base-case scenario is that this is not a systemic risk (as the cost to core Europe of not bailing out peripheral Europe is at least 2x the cost of bailing it out), Spain (which is 12% of European GDP) does not require a haircut and the ECB will end up repo-ing more and more peripheral European debt to offset deposit flight (the recap of the ECB has to be done by core Europe; this makes it a core European problem). We believe there is a 75% probability of a delayed and ‘agreed’ default in Greece: a roll-over of government bonds will be implemented, allowing GGBs to be used as collateral with the ECB, with restructuring being postponed until Greece runs a primary surplus, banks are better capitalised (each year PPP are 3% of loans) and the ESM is set up.

- What if? We believe there is a 15% probability of a unilateral default within six months, but this would be met by a quick European policy response. In this scenario, European markets are likely to fall 10% but offer an attractive buying opportunity (as the ECB will likely have to do QE). Lastly, we see a 5% probability of a unilateral default with a poor European response, a break-up of the Euro, a 5% fall in European GDP and a c20% decline in markets (and a 5% probability of Germany withdrawing from the Euro). We agree with our European credit strategist, William Porter, that leaving the Euro-area would just be an expensive way to default: if any peripheral European country left the Euro, we estimate GDP would fall by 20% or more (owing to the reliance on ECB funding and the need to tighten fiscal policy, as all these countries are running primary budget deficits).

- Investment conclusions: buy domestic Germany; stay short of domestic plays in peripheral Europe; buy Italy: it looks abnormally cheap and should not be considered part of the periphery, in our view; the euro could easily weaken to €/$1.35; banks do not offer sufficient appeal until they trade 10% lower; and we stay underweight Continental Europe.