The Citigroup economics team…made some noise late last week when they wrote that Greece would exit the euro on January 1, 2013 [and,] despite the results of this weekend’s Greek elections which favors bailouts, austerity, and the euro, Citigroup continues to believe Greece is likely to exit the euro. Here’s why. Words: 950
So report Sam Ro and Matthew Boesler in recent articles posted on www.businessinsider.com.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), may have edited the article below to some degree for length and clarity – see Editor’s Note at the bottom of the page for details. This paragraph must be included in any article re-posting to avoid copyright infringement.
Below are edited excerpts of what they said last week* (Boesler), and reiterated again this week** (Ro) after the election results, in part:
First from Boesler:
“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 that 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.
While we do not expect an early move to Eurobonds or full fiscal burden sharing, 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….[Furthermore,] 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, the 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.
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Saunders argued earlier this month that Greece faced a 50-75 percent 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 percent against the euro right away and remain devalued 50-60 percent 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 percent 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.”
Source: http://www.businessinsider.com/buiter-greece-will-leave-emu-on-1-january-2013-2012-5 (To access the above article please copy the URL and paste it into your browser.)
Ro posted comments from Citigroup Jurgen Michels published after the election results were announced, in part:
“Initial reactions from European officials welcome the outcome of the election, but made [it] very clear that the there is little room for the new government to change the existing bailout programme.
While the outcome of the election, and the likely agreement on an ND-led government has reduced the risk of an exit in the very near term, the large role of SYRIZA in Parliament and its power to organize protest against further austerity measures and far-reaching structural reforms on the streets, [makes] it looks to us unlikely that Greece will be able to fulfill only slightly amended conditions of the MoU.
With this in mind, our probabilities for Grexit [Greek Exit] remain unchanged in the range between 50% and 75% over the next 12 to 18 months.”
**Source: http://www.businessinsider.com/citi-greece-exit-euro-2012-6 (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
A predictive software program called Senturion, developed for the U.S. military and sporting a 85% accuracy rate, has concluded that Greece is going to default. [Let me explain further.] Words: 244
Given what is going on in the Eurozone – particularly with reference to Greece and Spain – but also with reference to France, Italy, Portugal, and the Netherlands, things seem to be increasingly spinning out of control. Should Greece exit the Eurozone there will most certainly be contagion issues arising which will be important to you whether you invest in the financial markets or not. Let’s take a look at them. Words: 502
I want you to understand the gravity of what Europe is facing; Europe has BET THE FARM and the croupier is about to roll the dice. We are all facing a momentous instant in time and all of the noise in the background is quelled by the showman announcing the main event. Let’s Roll! Words: 625
As many of you know, my primary forecast regarding Europe is that the EU will be broken up and/or collapse within the coming months. The reasons for this are financial, monetary and political in nature [with much of the latter dependant on what happens in Germany. Let me explain.] Words: 516
As the focus of the euro crisis shifts to Italy, IMF head Christine Lagarde has warned that European leaders have less than three months to save the euro. Meanwhile top economist Nouriel Roubini has called on Berlin to drop its obsession with austerity, proposing that the German government give every household a 1,000 euro [$1,250 US equivalent] voucher to spend on a vacation in Southern Europe. Words: 990
In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them. [Let us explain why that is the case and how it will come about.] Words: 680
Follow the eurozone crisis as it unfolds with this quick guide to key dates, developments, and investment implications.
Is it a coincidence that Greece, a country with a 40% smoking rate, has dug itself into such a financial mess? What is fiscal irresponsibility, if not an unwillingness to deal with discomfort today in exchange for future financial health? [Let me explain why an analogy to a country’s addiction to smoking is so appropriate when considering the Greeks’ attitude to their country’s sovereign debt woes.] Words: 650
For decades, the governments of the western world have been warned that they were getting into way too much debt. For decades, the major banks and the big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks. Well, nobody listened so now we get to watch a global financial nightmare play out in slow motion. Grab some popcorn and get ready. It is going to be quite a show. [Let me explain.] Words: 1075
Are we about to see a huge push for a “United States of Europe”? As the sovereign debt crisis in Europe continues to spiral out of control, suddenly this term is popping up in the New York Times and in major newspapers all over Europe. Is this by accident? Surely not. The truth is that there is an overwhelming consensus among the political and financial elite of Europe that a “United States of Europe” is what would be best for the eurozone. However, they are likely going to need a massive financial crisis in order to reach their goal. [Let me explain.] Words: 1639
The inability [of Congress] to reduce spending and tax its citizenry represents a competitive disadvantage for the U.S.. It is the mark of a country that cannot keep its fiscal house in order, does not care about repaying its debts and, [as such, it] may well be heading for collapse. Words: 978
Greece is going to default and even take the euro, and maybe the EU, with it. There will be 5 investment opportunities should that unfold as expected and one of them will be the U.S. dollar. [Let me explain.] Words: 1187
What event could trigger an unstoppable domino affect leading to a financial meltdown? You may think [that such a possibility is extremly unlikely] but daily we move closer to the real possibility that a major fiat currency such as the US Dollar or the Euro could collapse in the blink of an eye. [Let’s take a look […]
The magnitude of current private and government debt, coupled with massive unfunded contingent liabilities for promises of future services to their citizens, will prove to be impossible for many nations to fund. Massive inflation in the money supply will become the preferred vehicle to deflect the default monster and will result in vastly devalued currencies and price inflation as a prelude to default. Such action will be a desperate attempt to buy time to stave off the inevitable and will result in social unrest caused by persons whose comfortable lifestyle and elevated standard of living is about to disintegrate before their very eyes. Words: 1525
It is clearly evident that America’s debt picture is truly astronomical and, like the situation with Greece, the debt cannot, and never will, be repaid. Indeed, any way you look at it, the consequences for the United States, let alone the many other haunted economies, are grim, dismal – even disastrous. Words: 1166
It is appropriate that the fiscal crisis of the West has begun in Greece, the birthplace of Western civilization. Soon it will cross the channel to Britain. The key question, however, is when that crisis will reach the last bastion of Western power, on the other side of the Atlantic. Words: 609