Sunday , 21 July 2024

Citigroup: 50-75% Liklihood Greece Will Exit the Eurozone Effective January 1, 2013 – Here's Why

The Citigroup economics team…made some noise late last week when they wrote that Greece would exit the euro on January 1, 2013 [and,] despite the results of this weekend’s Greek elections which favors bailouts, austerity, and the euro, Citigroup continues to believe Greece is likely to exit the euro. Here’s why. Words: 950

So report Sam Ro and Matthew Boesler in recent articles posted on

Lorimer Wilson, editor of (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.

Below are edited excerpts of what they said last week* (Boesler), and reiterated again this week** (Ro) after the election results, in part:

First from Boesler:

“There are many uncertainties, but in our new forecasts we assume that Greece:

  • will leave EMU in early 2013,
  • followed by sharp currency devaluation,
  • with a large drop in economic activity in 2013 and
  • a modest rebound further ahead.

We believe that sizeable adverse economic and financial contagion to other euro area countries will be unavoidable and this is already happening to an extent. We expect that “Grexit” will be followed by far-reaching policy responses.

We forecast that the ECB will:

  • cut rates to 0.5% and resume its multi-year LTRO programme,
  • a second package for both Portugal and Ireland,
  • some kind of Troika programme for Spain,
  • plus financial market support for Spain’s and Italy’s government bonds.

While we do not expect an early move to Eurobonds or full fiscal burden sharing, if deposit flight from periphery banks escalates, then EU policymakers may agree to a jointly-funded enhanced deposit guarantee scheme (DGS)—which aims to protect deposits against EMU exit and currency denomination as well as bank insolvency—plus a jointly-funded bank recapitalization scheme….

[Furthermore,] we assume that:

  • the election will not produce a viable government that can follow the Troika plan, leading to a stalemate between the Greek government and official creditors, and to the suspension of EFSF/IMF funding.

The government’s cash reserves are limited, and probably will be exhausted well before year-end. Under these conditions, the Greek EMU exit could be triggered by:

  • the government’s need to print money to cover its spending,
  • or to fill the gap left by the outflow of deposits (if the ECB refuses to allow liquidity support directly or by vetoing the use of ELA).

Of course, we acknowledge the possibility that the timetable could be stretched out considerably by, for example, the use of internal IOUs by the Greek government or the provision of “last chance” temporary funding from EU policymakers on a week-to-week basis.

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Saunders argued earlier this month that Greece faced a 50-75 percent chance of leaving the euro. Here are a few more of his predictions for what will happen in the event of a Greek exit from the euro currency:

  1. The IMF and EU will step in to limit the damage of a Grexit: As has been pointed out repeatedly by many analysts and pundits, no one wants a mess here, insofar as it can be helped. Buiter says to avoid a “collapse of civil society” in Greece, the Troika will continue to offer low-interest loans in order to help Greece cover financing needs.
  2. An immediate 60% devaluation upon exit: Buiter says the new Greek currency will fall 60 percent against the euro right away and remain devalued 50-60 percent for five years. This is based on past experiences in other debt crises.
  3. All interest payments on external debts will be suspended: Buiter writes, “The general government debt/GDP ratio will soar to about 400% in 2013. We pencil in eventual debt restructuring for 2015, aiming to cut the debt/GDP ratio to the EMU average (which at that stage will be about 95%)—and this will require large debt write downs—probably covering both publicly held and privately held debt.”
  4. Greek GDP will fall by 10% in 2013: This should be followed by a 4-5 percent rebound by 2015-2016, according to Buiter.
  5. Greek inflation will surge to 20% in 2013 and 2014: Buiter writes that “given the very high jobless rate and hence probable low wage growth we do not expect that competitiveness gains from the lower currency will be fully offset by inflation straight away.”
  6. Contagion to the eurozone will be unavoidable: Yet, according to Buiter, contagion isn’t really the proper term, because other countries are facing similar problems to Greece and thus are already sick. He prefers to refer to Greece as “more of a canary in the coal mine.”
  7. The Troika has crossed the Rubicon with all the Greek exit talk: Buiter makes an interesting point here, writing, “in our view, these comments have fundamentally and permanently altered EMU from a supposedly irrevocable system to one in which exit is no longer ruled out.”
  8. You had better believe there will be an ECB policy response: Buiter is calling that the ECB will “restart its multi-year LTRO programme and cut rates to 0.5%.” He notes that this had previously been his forecast for 2013; now he sees it in happening in Q3 of 2012.”

Source: (To access the above article please copy the URL and paste it into your browser.)

Ro posted comments from Citigroup Jurgen Michels published after the election results were announced, in part:

“Initial reactions from European officials welcome the outcome of the election, but made [it] very clear that the there is little room for the new government to change the existing bailout programme.

While the outcome of the election, and the likely agreement on an ND-led government has reduced the risk of an exit in the very near term, the large role of SYRIZA in Parliament and its power to organize protest against further austerity measures and far-reaching structural reforms on the streets, [makes] it looks to us unlikely that Greece will be able to fulfill only slightly amended conditions of the MoU.

With this in mind, our probabilities for Grexit [Greek Exit] remain unchanged in the range between 50% and 75% over the next 12 to 18 months.”

**Source: (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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