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Citi Matrix Outcomes: If "Disorderly Grexit" Then "VIX At 80"

Tyler Durden's picture




 

According to some, the next Lehman-like event will be none other than a Greek exit from the Eurozone, especially if not firewalled, or in other words, disorderly. Considering how effective the Eurozone has been to date at anything orderly, it is a fair assumption that any Grexit-type event can only be disorderly. And while we appreciate that now flailing Spain has gripped the public's attention and been exclusively in the headlines for the past week, or ever since the start of the Greek poll moratorium, we can't help but recall that we are less than 10 days away from June 17, and the fact that for all the media disinformation, anti-bailout Syriza is likely to be the winner in the election, getting the automatic 50 extra seats that will make it likely it forms an anti-EUR government with a next step: Grexit. Pardon: a disorderly Grexit. The latest firm which see the Grexit as nothing but the coming of Lehman 2 is Citi, which in this convenient matrix predicts that such an outcome would lead to the same VIX at 80 outcome we saw in those days of September and October of 2008. Perhaps, for ole' fat tails sake, it is not a bad idea to buy some VIX calls here just in case.

Of course, if the ITA-BUND spread hits 720 bps, there will be bigger things to worry about than what counterparty will have the cash to make good on the other side of that VIX bet.

More from Citi:

1/ Managed Grexit with firewall in place but insufficient to remove EMU break up risk or risk aversion: Our analysis suggests that EURUSD can drop to 1.2000 under this scenario (Figure 5). We expect both VIX to move higher to 35vols and BTP yields to temporarily break above 600bp (Figure 5). In ‘International Interest Rate Strategist from 17 May 2011 Citi’s rate strategists published estimates of German bond yields that are theoretically with unchanged probability of EMU break-up  as well as a spike in global risk aversion. In particular, German 2y yields which currently stand 6bp could trade as low as -35bp. In the case of the Bund yields, our rate strategists estimate a drop to 85bp from current 143bp. The BTP-Bund yields spread and Germany-US 2y bond yield spread are expected to widen/ tighten from current levels (Figure 5). Importantly, both Italy-Germany bond yield spread and VIX are expected to remain below their 2011 highs.

2/ Managed Grexit with firewall implemented in response to Grexit: Our analysis suggests that EURUSD can drop to 1.1300 under this scenario (Figure 5). We expect both VIX and BTP yields revisit their 2011 highs. In ‘International Interest Rate Strategist from 17 May 2011 Citi’s rate strategists also published estimates of German bond yields that are theoretically consistent with a 5-10% increase in the probability of EMU break-up (estimated to be 19% at present) as well as a spike in global risk aversion. Under this scenario, the German 2y yields could trade as low as -75bp while the Bund yields could drop to 70bp. The BTP-Bund yields spread and Germany-US 2y bond yield spread are expected to widen/ tighten considerably as a result (Figure 5).

We suspect that any further significant escalation in the euro zone debt crisis could be met with a concerted policy action by all major central banks. In turn this is likely to add to the downside pressure on the short-term government bond yields across the board. In addition, one could argue that escalating demand for safe haven could push US treasury yields temporarily below zero and thus result is somewhat less negative Germany-US 2y bond yield spread. The impact on our projection need not be that great given the relatively small size of the beta coefficient. For example, a drop in the 2y rate spread to only -50bp will mean that EURUSD would fall by 0.4bf instead of our original projection of 1.2bf. 

3/ Disorderly Grexit with excessive volatility in other markets: Our analysis suggests that EURUSD can drop to 1.0100 under this scenario (Figure 5). We deem this scenario much less likely than the previous two given that the policy response by global central banks and policy makers is likely to be swift. We nevertheless decided to include the scenario to provide a worst case estimates. In particular, we keep our assumption for German rates but expect that the BTP yields surge to 800bp leading to further widening in the spreads to Germany to 730 bp. We also assume that VIX moves closer to its Lehman highs (Figure 5). We have to admit that the assumption regarding the BTP yields is somewhat arbitrary. BTP yields surged well above 800bp in the years before the introduction of EUR.

 

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Fri, 06/08/2012 - 10:01 | 2507008 achmachat
achmachat's picture

USD/EUR at parity???

wouldn't it be kind of EUR positive if the EUR got rid of the countries hemorrhaging money? 

Fri, 06/08/2012 - 10:04 | 2507023 GeneMarchbanks
GeneMarchbanks's picture

I'd love to see parity. Sweet Lord puh-leeze give us parity.

Citi... hilarious.

Fri, 06/08/2012 - 10:06 | 2507029 SHEEPFUKKER
SHEEPFUKKER's picture

I'm sure it will be a very orderly exit, that's why no one has been able to sort this out for three freakin years. /sarc

Fri, 06/08/2012 - 10:14 | 2507059 Overflow-admin
Overflow-admin's picture

They have orderly exit templates... File -> Print.

Fri, 06/08/2012 - 10:15 | 2507060 malikai
malikai's picture

Sounds like cobalt-thorium-g.

http://www.youtube.com/watch?v=2yfXgu37iyI

Fri, 06/08/2012 - 10:44 | 2507229 tocointhephrase
tocointhephrase's picture

How do you like your eggs in the morning?

Fri, 06/08/2012 - 12:23 | 2507651 DarkestPhoenix
DarkestPhoenix's picture

Fertilized.

Fri, 06/08/2012 - 10:16 | 2507066 slaughterer
slaughterer's picture

"It's like the fucking Twilight Zone with this shit!"

Fri, 06/08/2012 - 10:25 | 2507116 Quintus
Quintus's picture

Remember whose money it is that they're hemorrhaging, how much of it the PIIGS now owe, and how unlikely it is that the money will be returned post-exit.

If you owe the bank €100 you have a problem....etc

Fri, 06/08/2012 - 10:31 | 2507158 malikai
malikai's picture

Who'se going to pay Greece's debts? Germany. Who is the euro? Germany.

Checkmate.

Fri, 06/08/2012 - 14:54 | 2508242 scythian empire
scythian empire's picture

bernak wants to act so hard he can. taste. the. q.e.

 

then what vol?

Fri, 06/08/2012 - 10:40 | 2507208 spankthebernank
spankthebernank's picture

Any way you slice it VIX up from here....

Unless you get the election year circle jerk....which we probably will.

Fri, 06/08/2012 - 10:02 | 2507016 LeBalance
LeBalance's picture

What if some "evil" being were to take all the Greeks to the empty Chinese cities, call them Idependent Country 01 People, dissolve the construct called Greece, and then say. "Fuck Off Banksters?"

/Joker!/

Fri, 06/08/2012 - 11:17 | 2507408 dracos_ghost
dracos_ghost's picture

Or Greece stays in the EU, becomes a 100% offshore haven for the rest of Europe with specific instructions to destroy other EU banks, collapse those banks and become the premier EU state.

Fri, 06/08/2012 - 10:03 | 2507021 PR Guy
PR Guy's picture

 

 

Can someone put a gold forecast column on the end of that table please.

I am predicting a co-ordinated, global central bank action within the next few days. Part of that announcement may be something along the lines of 'protection against bank runs' If you are in Europe and haven't bought your Swiss Francs at the current rate and jumped on board that lifeboat, I suggest you get your finger out pronto. That lifeboat is going to set sail soon (bitchez!).

Fri, 06/08/2012 - 10:07 | 2507035 Stoploss
Stoploss's picture

Coordinated global default.

Uncoordinated global default.

 

 

Pick one..

Fri, 06/08/2012 - 10:37 | 2507189 XitSam
XitSam's picture

<- Disorderly

<- Chaos

Fri, 06/08/2012 - 10:08 | 2507036 The Swedish Chef
The Swedish Chef's picture

Are these the same people that make the NFP estimates or earnings estimates? Because then just go back to sleep, they have no fucking clue. Just churning out pages because thats what they get payed to do.

 

Fri, 06/08/2012 - 10:08 | 2507039 Skip 2 My Lou
Skip 2 My Lou's picture

Scenario 4 - Disordenaly Grexit, Portugal and Spain (too big too bail). Shut Europe down and build a big church with parking lot!

Fri, 06/08/2012 - 10:10 | 2507043 Pairadimes
Pairadimes's picture

The only thing certain about the future is that it will look nothing like any of these scenarios. I love how these people think they can account for a half-dozen contingencies and then confidently describe the results. There are simply too many sovereign actors and treacherous politicians in this drama.

Fri, 06/08/2012 - 10:10 | 2507045 slewie the pi-rat
slewie the pi-rat's picture

 

just in case there is a grexit...

  • i'll put $100 on the firewall failing
  • and $50 on the vix: under-80
Fri, 06/08/2012 - 10:11 | 2507048 timbo_em
timbo_em's picture

Unless Mme Lagarde finds some generous donors pretty soon, that firewall will remain a Ponzi scheme. Or maybe JM Barroso and JC Juncker find a convincing way to explain that while Spain needs a bailout it will still honor its committments to the EFSF and ESM?!

Fri, 06/08/2012 - 10:11 | 2507050 Jason T
Jason T's picture

scary stuff we're up against.   

Fri, 06/08/2012 - 10:15 | 2507063 Dr. Engali
Dr. Engali's picture

I'ts not scary if you're prepared.

Fri, 06/08/2012 - 11:23 | 2507431 RationalPrepper
RationalPrepper's picture

I'm not sure about that, Doc.  It ain't gonna be good for anybody...even those who've taken steps to prepare.  It's impossible to know exactly how things will play out.  Even if you're independently wealther, well-stocked, and ready, you'll have to deal with 2-legged rats.  That won't be pleasant.  True - you'll be far better off than those that are blind-sided, but it won't be easy or fun.  Having said that, what are your top 3 recommendations for "prepping?"

Fri, 06/08/2012 - 11:10 | 2507366 debtor of last ...
debtor of last resort's picture

I d probably feel like Nelson Mandela leaving Robbeneiland.

Fri, 06/08/2012 - 10:15 | 2507064 Peter K
Peter K's picture

EUR/USD @1.0100 under most likely scenario?

Sounds about right. :)

Fri, 06/08/2012 - 10:25 | 2507114 _ConanTheLibert...
_ConanTheLibertarian_'s picture

It would be an 80 Volts shock...

Fri, 06/08/2012 - 11:05 | 2507337 HelluvaEngineer
HelluvaEngineer's picture

I think you mean amps

Fri, 06/08/2012 - 10:26 | 2507124 mayhem_korner
mayhem_korner's picture

 

 

Why do they use fancy tables?  Why not just come out and say it? - if you don't print more money, we are...er...the markets are going to collapse.

Fri, 06/08/2012 - 10:30 | 2507144 hugovanderbubble
hugovanderbubble's picture

Citi Rocks¡

Fri, 06/08/2012 - 10:32 | 2507166 XtraBullish
XtraBullish's picture

If Kyle Bass says "Guns 'N Gold, baby!" then that's where I'm puttin' my coin.

Fri, 06/08/2012 - 11:53 | 2507548 RationalPrepper
RationalPrepper's picture

Got any links to recent (last 1-2 months or so) of commentary/thoughts from Mr. Bass?  I haven't heard/seen anything for awhile.

Fri, 06/08/2012 - 10:33 | 2507173 El Oregonian
El Oregonian's picture

Well, it looks like just about every one in Europe is up the GREEK without a paddle...

Fri, 06/08/2012 - 10:37 | 2507188 Aunty Christ
Aunty Christ's picture

German 2year - US 2 year spread at -100 in 2 out of the 3 scenarios? WHat crack are the boyz at Citi smoking?

Fri, 06/08/2012 - 10:40 | 2507210 SmoothCoolSmoke
SmoothCoolSmoke's picture

Meanwhile..... NY FED obviously pumping cash into the Dow to hold it up into the weekend.....as there is no other logical explanation.  SOS.

Fri, 06/08/2012 - 10:54 | 2507282 Zola
Zola's picture

All this time wasted for nothing. 2 year, trillions of dollars lost in bailouts and malinvestments, for what ? The same scenario ? All these politicians should be stripped of all their assets and left on the dole.

Fri, 06/08/2012 - 11:16 | 2507395 Nobody For President
Nobody For President's picture

Another bank, more scenarios - so what happens if Syzria wins but can't put together a 151 vote + parliment, and there once again is no government?

In the 1970's, there was a military coup/government, so it is not beyond possibility the military steps into the total chaos of no government and takes over the mess.

They would probably cut a deal with the Troika that would extend and pretend another six months.

But it would be 'disorderly'...

Fri, 06/08/2012 - 13:36 | 2507922 bugs_
bugs_'s picture

flash grext

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