Last summer, Citi’s chief economist, Willem Buiter, introduced a bold call: he assigned a 90% probability that Greece would exit the euro on January 1, 2013.
This assertion was made before European Central Bank President Mario Draghi introduced a new ECB bond-buying program, dubbed “OMT” (outright monetary transactions), which has more or less completely quelled the turmoil that the European sovereign debt crisis has inflicted upon markets over the past few years.
Needless to say, Buiter’s dramatic call didn’t work out. By October, Buiter and his team revised the odds of a Greek exit to 60%, and even then, only by the end of 2013.
However, they maintained that a Greek exit was still their base case, saying it would likely happen in 2014, after the German elections.
In a note out today, the Citi economics team is once again walking back their views toward the likelihood of a Greek exit from the euro.
Here’s the key section:
Grexit Postponed, Euro Area Economy Still Weak
The euro area economy remains weak, and GDP has now fallen for six consecutive quarters. Growth prospects remain poor, and we expect that the euro area will continue to underperform versus official forecasts and the consensus in 2014 and 2015. Nevertheless, we have become a bit less gloomy on euro area growth for next year, and we are raising our 2014 growth forecast from minus 0.3% last month to 0.0% this month (while pulling our 2013 forecast down from minus 0.6% to minus 0.7%).
This upgrade reflects two main factors. First, with the drift to accepting deficit slippage amidst economic weakness and low government bond spreads, fiscal headwinds in the weak periphery economies should be less severe than seemed likely a few months ago. The IMF has scaled back its forecast for the average (unweighted) structural fiscal tightening in Italy, Spain, Portugal, Greece and Ireland in 2013 to 1.2% of GDP from 1.8% of GDP in its late-2012 forecast. Second, we are no longer including Grexit at the start of 2014 in our base case. We still believe that there is a fairly high risk of Grexit in coming years, but no longer put it in our base case at any particular date. This partly reflects a lower risk of Grexit, but also a sense that, with creditor nations taking a more relaxed line on fiscal targets and Greece’s coalition government holding together, triggers for Grexit as early as 2014 have receded markedly. The chosen date was always somewhat arbitrary, but to construct a consistent forecast we pencilled in sizeable Grexit-related uncertainties and financial strains around that date, hitting the 2014 growth outlook. That intensified headwind is now absent in our forecast.
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