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EFTA01171081 | EFTA01171085 Fiscal adjustments, then and now 4 (Po 3 0% O 0 0 20° O. 0 Prior European and Latin adjustme n7f).21: Iceland took the normal route, and is now recovering Sovereign credit default swap spread. basis points 1.200 Greece to 5700 t Iceland 900 600 11 4 / 2010 EMU fiscal adjustments 300 Currency Devaluation, 7. 20% 60% 40'. 80% Source In ter national Monetary F und. Organization for Economic CoOP elabOn and Development. BarclaysCaprtal. Bloomberg. 100% 0 Jun.07 Feb-08 Oct-OS Jun-09 Feb-10 Oct-10 Jun-11 Source: J.P. Morgan Securities LLC. There is no question that there would be severe costs to Greece if it defaulted and exited the Euro. If Greece had to rely on its central bank to finance budget deficits, they would risk a substantial rise in inflation (which could erode the devaluation benefit), and in turn, further damage the credibility of the Bank of Greece. There could also be disruptions to trade finance (which could be ameliorated by the IMF in ways that more constructive for Greece than what they are doing now). The question is whether exiting offers the chance of something better for Greece than the certainty of failure associated with staying in the Euro. That is what Greece is in the process of debating; a temporary government is unlikely to be the last word on this. Michael Cembalest Chief Investment Officer The Sun Also Rises: Iceland's post-devaluation recovery Unlike the rest of Southern Europe, Iceland pursued the traditional formula: fiscal austerity, a large currency devaluation (which led to a rapid improvement in its current account deficit), an IMF loan and most importantly, the refusal to take on the obligations of Icelandic banks. Iceland's debt/gdp ratio is now around 100% (having risen from 40% a few years ago), so why are Iceland's credit spreads so much tighter than in Ireland and Portugal and tighter than Italy? Iceland suffered a huge spike in inflation and unemployment in 2009, and a terrible collapse in GDP and private consumption as well. But by 2010, the standard adjustment started to play out, in which GDP, trade, private consumption and capital spending are now rebounding. Inflation, which hit 18% in 2009, is back at 2%. The budget deficit is 4.5% of GDP, requiring less austerity going forward than Southern Europe. Iceland is expected to grow at around 3.5% to 4.0%, which helps solve a lot of problems, and puts the government debt ratio on a trajectory to decline rather than rise. Iceland's unemployment has risen to 9%, but is stable and now half the rate in Southern Europe. A fiercely independent country, it also controls its own destiny. Notes [a] Unfortunately for Italy, of all reforms, labor market reforms are the ones with the largest short-term negative impact on growth. See "Fostering structural reforms in industrial countries", IMF, 2004, Chapter 3, Exhibit 3.9. [b] A lot depends on whether participants in the first exchange (if it happens) could be defaulted upon a second time in the future. In other words, if any new bonds are cross-defaulted with existing Greek debt, and in 2012 Greece defaults on those who did not participate the first time, there's no reason to participate today, since you will be defaulted upon twice. To avoid this outcome, the bonds offered in the current exchange would have to either be subject to UK law (as opposed to Greek law), or collateralized in some reliable way. The material contained herein is intended as a general market commentary. Opinions evpressed herein are draw ofMichael Cembalest and may differfrom those ofother J.P. Morgan employees and affiliates. This information in no vary constitutes J.P. Morgan research and shouldnot be treated as such. Further. the views expressed herein may digerfrom that contained in J.P. Morgan research reports. 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May 12, 2026 at 3:05 PM