In his latest note, Citigroup economist Michael Saunders, who works with Willem Buiter, argues that Greece will leave the euro on the first day of 2013.He says it’s not 100 per cent certain, but that it’s the the current belief.
In the intro he writes:
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 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. We do not expect an early move to Eurobonds or full fiscal burden sharing. But, 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.
He explains later in the note:
Greece will leave EMU on 1 January 2013. We believe the ECB will be willing to provide liquidity support for Greek banks (to replace lost deposits) until the June 17 election, either directly or via the expansion of Greece’s ELA. But, 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, 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.
To investors freaking out about the prospect of a Greek exit sometime next month, his forecast qualifies the immediacy of the Grexit threat, though he admits it is subject to change.
Saunders argued earlier this month that Greece faced a 50-75 per cent 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:
- 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.
- An immediate 60% devaluation upon exit: Buiter says the new Greek currency will fall 60 per cent against the euro right away and remain devalued 50-60 per cent for five years. This is based on past experiences in other debt crises.
- 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.”
- Greek GDP will fall by 10% in 2013: This should be followed by a 4-5 per cent rebound by 2015-2016, according to Buiter.
- 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.”
- 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.”
- 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.”
- 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.
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