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Citi analysts are making headlines this morning, increasing their assessment of the likelihood that Greece will leave the euro currency.Before yesterday’s elections, they had believed there was a 50 per cent chance the country would see a “Grexit.” Now they believe that the likelihood of a Greek exit is now 50 to 75 per cent.
With diminished support for austerity and the likely fragility of any coalition that forms in the wake of the election (if it forms at all), Guillaume Menuet and Jurgen Michels predict that the ECB/EU/IMF troika will soon be forced to withhold the funding that is keeping the Greek government from a more complete default:
Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme. Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme. If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%. However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. We continue to expect that in reaction to Greece leaving the euro area, more far-reaching measures from governments and the ECB would be put in place.