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Citi chief economist Willem Buiter and his team are out with their latest monthly Global Outlook and Strategy report, and they still see a Greek exit from the euro as a near certainty.In fact, they think it’s looking more likely than it did last month.
The bearish call comes despite the ECB’s latest OMT bond-buying plan, widely believed to eliminate the tail risk of a big shock in the eurozone, and despite the prognostications of euro area leaders – especially in the economically sound “core” countries like Germany’s Angela Merkel – that a Greek exit would spell disaster and is to be avoided at all costs.
A few key points from Citi economist Michael Saunders:
- The probability of a Greek exit from the euro has not receded in the wake of the ECB announcement; on the contrary, it’s now more likely because it’s “more manageable”
- Troika leaders (from the ECB, IMF, and the EU) probably don’t think a Greek exit is as big a deal as they thought it was before the ECB announced its new plan
- A Greek exit would still cause capital flight from Italy and Spain but would be necessarily accompanied by massive global central bank intervention
Here is Citi’s full take on “Grexit,” from the note:First, we continue to put the probability of ‘Grexit’ (Greece exits EMU) in the next 12-18 months at about 90%, and within that period believe it is most likely to happen in the next 2-3 quarters. Fiscal trends remain weak, with revenues and privatization proceeds markedly undershooting official forecasts, while the election earlier this year has not significantly improved Greece’s ability to get the programme back on track. Moreover, the Troika members probably are now much less fearful than early this year about the systemic consequences of Grexit. Private sector exposure to Greece has been cut sharply, while a potentially adequate firewall for Italy and Spain is now in place through the combination of an EFSF/ESM programme plus the ECB’s OMT framework.
Prior attempts to construct a firewall — by leveraging up the EFSF, expanding IMF resources or introducing the ECB multi- year LTROs — either failed to get off the ground or lacked staying power. Until recently, the absence of a solid firewall for Italy and Spain raised risks that Grexit would destabilise the overall euro area, hence more or less obliging the Troika to continue to support Greece. Now, with a firewall in place, Grexit is more manageable and hence more likely. Grexit probably would still intensify capital flight out of other periphery countries, but it also would probably be accompanied by OMT-related support for Italy and Spain plus massive liquidity support from the ECB and other major central banks.
Nevertheless, Grexit is not certain and its potential timing is highly uncertain. The risk of Grexit in the next couple of months probably has receded, with deadlines being pushed off. Policymakers may be unwilling to trigger Grexit in the run-up to the US elections, and while Middle East tensions are so high. We continue to assume, for modelling purposes, that Grexit occurs on 1 January 2013, but stress that gauging the precise timing of such an event is next to impossible. Indeed, there is a chance that the current paralysis of deferred deadlines plus reliance in Greece on short-term bill issuance and ELA expansion could extend for a while into 2013.
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