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Citi’s European economics team, one of the most bearish on the Street, has been saying since this summer that they saw the odds of a Greek exit from the euro currency by the end of 2013 at a highly likely 90 per cent.Today, though, they are paring those odds all the way down to 60 per cent.
However, they still think a Greek exit seems likely, but not until 2014.
In a note to clients, the team, led by Citi economist Jürgen Michels, writes:
We have held the view, since May 2012, that a Greek exit from the euro area (“Grexit”) in the next 12 to 18 months is a high-probability event (90%)1 which we assume, for the sake of argument, would happen on January 1 2013. We are now cutting the probability of Grexit over the next 12-18 months to 60% and judge that this event will probably happen later than we previously thought, most likely in 1H 2014. The change in our view reflects the change in the attitude of core euro countries towards Grexit, with the German elections getting closer, and the decent PR job done by the new Greek Prime Minister around European capitals.
We still believe that increasing austerity fatigue in Greece, continuous missing of deficit targets and the ensuing stalemate in the negotiations between the Greek government and its official lenders will ultimately lead to a suspension of EFSF/IMF funding which, in our view, will eventually lead to Greek banks being cut off from Eurosystem funding. Without virtually any domestic resources available, we believe the only way out for Greece would be to leave EMU and start printing a new currency to fill its funding gaps.
Citi explores the German elections angle in a little more detail as well:
We think the position of German Chancellor, Angela Merkel, with respect to Grexit, has shifted recently as the German elections are getting closer (September 2013, most likely) and she fears the negative economic repercussions of an event like Grexit on her chances of re- election. The rhetoric from other European officials, from Finland or the Netherlands for example, has also changed somewhat recently.
Moreover, economic data in core Europe have been suggesting that activity could weaken further in 2013 and the complexity of fiscal, political, economic and financial challenges in Spain has risen — all of which imply less resilience of the European economies in case of an exogenous shock like Grexit. The escalation in the Spanish problems may have also pushed European leaders to realise that this is not an ideal time to deal with Greece leaving the EMU.
Still sounds pretty pessimistic.
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