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Citi Sees Greek Exit As Soon As September

Tyler Durden's picture


"Prolonged economic weakness will persist - especially in the peripheral countries - with further periods of intense financial market stress" is how Citi's Willem Buiter's economics team sees the future in Europe. While they continue to believe that the probability of a Greece exit from the Euro is around 90% in the next 12-18 months; but more critically it is increasingly likely in the next six months - conceivably as soon as September/October depending on the TROIKA  report. There is a crucial series of meetings and events in coming weeks and while they believe that the ECB's conditional bond-buying (and ESM/EFSF) may help avoid a 'Lehman moment' around the GRExit, they believe that there will still be considerably capital flight out of periphery assets should it occur. The reason being simply that even if funding costs were reduced, the current mix of fiscal austerity and supply-side reform will not return any periphery country to a sustainable fiscal path in coming years.

Citigroup: Global Economic Outlook

We continue to expect that the EMU crisis will persist, with prolonged economic weakness — especially in periphery countries — and further periods of intense financial market stress:

Euro area GDP fell in Q2 and we expect that overall euro GDP will fall in both this year and 2013, with severe falls in most periphery countries. The Citi Economic Surprise Index (CESI) for the US recently has moved close to neutral, but for the euro area it remains firmly negative.

Nevertheless, the ECB's efforts probably will not resolve worries over the long-run fiscal sustainability of periphery EMU countries:

Even with the resultant relatively low funding costs, we doubt that the current mix of fiscal austerity and supply-side reform will return any periphery country to a sustainable fiscal path in coming years. Supplyside measures rarely have big short-term effects on growth (indeed, labour market reforms can produce negative short-term effects), especially if limitations in credit supply limit scope for companies and households to borrow in anticipation of the eventual payoff from reforms. Any such boost probably will be overwhelmed by the drag from fiscal austerity — plus a varying mix of poor external competitiveness weak banking systems, weak housing markets, high private debts. Hence, we expect that growth in periphery economies will undershoot official forecasts, leading to above-target and generally rising government debt/GDP ratios in coming years.


And the likelihood of Greece exit is becoming clearer:

...while the ECB’s decisions may help limit the economic and financial market spillovers of Grexit, the likelihood of Grexit itself is coming into even sharper focus, in our view. There appears to be a sizeable — and probably unbridgeable gap between the Greek government’s ability to quickly cut the fiscal deficit and implement major supply-side reforms and privatisations, and the measures that creditor nations would require to extend further funding.

We continue to put the probability that Greece will exit the euro area (ie “Grexit”) in the next 12-18 months at about 90% and, within that timeframe, we think it is increasingly likely that Grexit will occur in the next 6 months or so, conceivably even as early as September/October depending on the outcome of the September Troika report on Greece.

but a range of factors will determine the timing:

The precise timing of Grexit, if it happens, remains uncertain. It could even occur as soon as September/October, if the upcoming Troika report confirms that Greece’s programme is off-track and creditor nations are unwilling to provide Greece any funding extension or extra time. However, creditor nations may provide enough funding to delay Grexit to after the December review, for example to allow plans for common bank supervision to be finalised.

Though the mechanics of the event will be extremely ugly - with dramatic inflationary impacts for the Greeks:

The exact mechanics of Grexit also are uncertain. We envisage an extended bank holiday and some form of capital controls and limits on deposit withdrawals in Greece (and perhaps some temporary restrictions in some other EMU countries as well). Prior examples highlight that currency redenomination need not be uniform: for example, when Argentina abandoned its currency peg to the US$ in 2002, the government decided to apply a 1-to-1 exchange rate for Bank loans and a 1.4-to-1 exchange rate to deposits.


Moreover, when East Germany adopted the Deutsche Mark as legal tender on July 1, 1990, just ahead of German unification in October of the same year, the East German mark was converted at par for wages, prices, pensions and savings up to a limit of 4000 East Mark/person. Financial claims, including corporate and housing loans, and savings in excess of 4000 East Mark were converted at a ratio of 2:1 into the Deutsche Mark. We assume that a new Greek currency would fall by about 60%, pushing inflation markedly higher in 2013-16, but the scale of currency decline is highly uncertain. 

And GREexit will not be the cathartic event many hope for:

We think the EMU end-game is likely to be a mix of EMU exit (Greece), a significant amount of sovereign debt and bank debt restructuring (Portugal and, eventually, perhaps Ireland, Italy and Spain), with only limited official fiscal burden sharing (via the ESM, EFSF and ECB losses) and ongoing liquidity support from the ESM and the ECB. We still expect that Portugal will get a second bailout (or a prolonged extension of the current programme), with no PSI initially but a high chance of PSI and OSI over the next three years or so.


Ireland may well also need some external assistance beyond the end of the current programme, although — with the deficit likely to undershoot official forecasts and evidence that the country has some access to markets — this may take the form of partial funding via the EFSF/ESM and the backstop of ECB market purchases if needed.

Nevertheless, for Portugal, Ireland, Italy and Spain, the crisis looks set to leave a legacy of high unemployment and very high government debt/GDP ratios (90%+, and, in most cases, well above that level). We doubt that any of these countries will be able to sustain normal market access at a tolerable yield without the backstop of official support in coming years.


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Wed, 08/22/2012 - 15:26 | 2728432 bankruptcylawyer
bankruptcylawyer's picture

first bitchez.

Wed, 08/22/2012 - 15:29 | 2728439 Clueless Economist
Clueless Economist's picture

Once again, Graham Summers is proven correct on his prediction of a Greek exit.

His newsletters are worth their weight in gold to me.

Get a subscription, if you want to stay ahead of economic matters.

Wed, 08/22/2012 - 15:34 | 2728462 bank guy in Brussels
bank guy in Brussels's picture

Thanks for the good hearty laugh, Dr Krugman!

At your best you are funnier than MillionDollarBonus

Wed, 08/22/2012 - 15:37 | 2728473 malikai
malikai's picture

LOL! You're killing me. Stop!

Wed, 08/22/2012 - 18:25 | 2728894 CrashisOptimistic
CrashisOptimistic's picture

Pimp your sub on your own traffic, Graham.

Wed, 08/22/2012 - 20:21 | 2729066 Buck Johnson
Buck Johnson's picture

No kidding, it seems that things are coming to ahead.

Wed, 08/22/2012 - 20:59 | 2729134 TwoShortPlanks
TwoShortPlanks's picture

A Greek, such a radical call. Who could ever predict such a thing?! <sarc/off>

I predicted a Gold Standard on ZH about two years ago and was laughed at, now many think it's inevitable.

More of my prediction: In an initial move (of many), Gold will be pegged between $40-60k ($44,230/oz and $55,885/oz). After a series of revised peggings it will finally be pegged around $100k ($97,685/oz). Why so high you ask? Coz you can't unscramble eggs Bitchez!

First pegging will come before Obummers mid-terms (yes, he will remain in office). Final pegging will be before the end of his (next) term.

You have less than 30 months before Gold becomes unobtainable, for 20+years.

PS. I also predicted 3 years ago that Perth, WA would collapse after a massive mining contraction. Sold my house and moved interstate a year ago. I don't just say things, I follow-em.

Wed, 08/22/2012 - 15:32 | 2728456 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

ambulance chaser

Wed, 08/22/2012 - 15:38 | 2728478 slaughterer
slaughterer's picture

Citi (Buiter) is right.  This report (and the recent Janjuah update) are the two most important reports this week.

Wed, 08/22/2012 - 15:53 | 2728525 ebworthen
ebworthen's picture

bankruptcylawyer said:  "first bitchez."

You mean Greece will be first to exit the Euro?

Sure it won't be Germany instead?

Talk about a Blitzkreig...

Wed, 08/22/2012 - 19:13 | 2728968 Peter Pan
Peter Pan's picture

You mean a bitchkreig?

Thu, 08/23/2012 - 04:45 | 2729550 piliage
piliage's picture

German politicians have drank the kEUool-aid, and will find some way to push just enough money to Greece to keep debts solvent while the Greek people continue to starve. The irony is, the biggest private debt outside of the 35 bil held by the ECB is not Germany, but France's 10bil. Once again, the French use the EU to screw the Germans, this time Greek style.

This ain't ending until there is a coup in Greece, which may in fact be the ultimate end game. Greece never recovered nor solved its problems after the last junta in 1967.

Same could be said for spain too. These are powderkegs ready to explode with armed violence.


Wed, 08/22/2012 - 16:10 | 2728582 battle axe
battle axe's picture

Now watch Bank Of America will double down on Greece.



Wed, 08/22/2012 - 15:30 | 2728447 CClarity
CClarity's picture

Still better for Germany, Nederlands, Finland and some others to leave.  The peripherals need the common currency more than the healthy states now, even if it plunges in value.

Wed, 08/22/2012 - 16:06 | 2728576 john39
john39's picture

that would make sense if the german government actually represented the interests of the german people...  but just like in the U.S., the governments are all controlled by corporate interests at this point, so don't expect any action that would benefit the people and harm the big corporate interests...  expect the opposite.

Wed, 08/22/2012 - 15:30 | 2728448 Dalago
Dalago's picture

The system was made to fail.  Ultimate power grab.

Wed, 08/22/2012 - 15:49 | 2728516 iDealMeat
iDealMeat's picture

Yup..  planned obsolescence..  Anything else is not profitable..


Wed, 08/22/2012 - 15:31 | 2728450 bank guy in Brussels
bank guy in Brussels's picture

From Jim Sinclair today re Europe

« This is the greatest soap opera in monetary history »

Wed, 08/22/2012 - 15:45 | 2728460 Mercury
Mercury's picture

There is a crucial series of meetings and events in coming weeks and while they believe that the ECB's conditional bond-buying (and ESM/EFSF) may help avoid a 'Lehman moment' around the GRExit, they believe that there will still be considerably capital flight out of periphery assets should it occur.

There is always a crucial series of meeting and events with Eurocrats.

Stay long the pan-European Catering ETF.

Plus, it may help support the moonlighting gig of the odd Fight Club member.

But if you're an actual antendee...stay away from the soup ;)

Wed, 08/22/2012 - 15:36 | 2728468 The worst trader
The worst trader's picture

Bullish! I'm so done with these crooks.

Wed, 08/22/2012 - 15:42 | 2728472 timbo_em
timbo_em's picture

Green Day sucks but wake me up when august ends.

btw: Has anyone a clue what happens to the Greek bonds that the ECB holds and what happens to the TARGET2 liabilities of Greece if the country is forced to leave?

Wed, 08/22/2012 - 15:41 | 2728475 Hype Alert
Hype Alert's picture

The precise timing of Grexit, if it happens, remains uncertain. It could even occur as soon as September/October, if the upcoming Troika report confirms that Greece’s programme is off-track and creditor nations are unwilling to provide Greece any funding extension or extra time. However, creditor nations may provide enough funding to delay Grexit to after the December review, for example to allow plans for common bank supervision to be finalised.


Did I read something today that Greece has asked for more time already?  Merkel hadn't responded.


Edit: Yes I did.

Wed, 08/22/2012 - 15:38 | 2728477 ParkAveFlasher
ParkAveFlasher's picture

See Greece run.  See Ben print.  See Gold launch. 

Run, Greece, Run!

Wed, 08/22/2012 - 15:39 | 2728481 Nothing To See Here
Nothing To See Here's picture

BS. Fiscal austerity WOULD bring back growth. If taxes were not siphoning it, that is.

Wed, 08/22/2012 - 15:40 | 2728483 magpie
magpie's picture

I don't see this happening, they went all in for Spain and Italy already. The ships are tied together for the finale.

Wed, 08/22/2012 - 15:40 | 2728486 Haager
Haager's picture

Ha, damn soup opera - and they are already in season 2. Season 3 is written and they already have plans for season 4.

Wed, 08/22/2012 - 15:40 | 2728489 kito
kito's picture

Citi Sees Greek Exit As Soon As September....

riiiight.........because citis predictions are more valuable than a $5 tarot card reader at the boardwalk........................

Wed, 08/22/2012 - 15:48 | 2728515 Hedgetard55
Hedgetard55's picture


When was the last time Buiter was correct on anything? Just another worker bee in the bankster hive.

Wed, 08/22/2012 - 15:42 | 2728495 bank guy in Brussels
bank guy in Brussels's picture

Peter Tchir was one of the best commentators on ZeroHedge on Europe ... sorry we have not seen him recently ... In June he said this

« ... Maybe I’m wrong, but every time I look at the possibility of a Greek exit right now I see it spiraling out of control and dragging down the entire global economy. I hear and read the arguments of why it is controllable and they just don’t seem credible. ... »

'Why a Grexit Would Make Lehman Look Like Childs Play'

Couldn't find it in the ZeroHedge search box but at least article is here on another site:

Wed, 08/22/2012 - 15:43 | 2728498 Bam_Man
Bam_Man's picture

Would not be at all surprised if a Greek exit is imminent.

The ECB talk of "unlimited bond purchases" and now the Fed openly hinting that they will be easing "soon" seem to suggest that the Central Banks are preparing for "an event". Greek exit from the Eurozone would certainly qualify.

Wed, 08/22/2012 - 16:03 | 2728567 johnQpublic
johnQpublic's picture

no way they leave before november 3rd

no way

Wed, 08/22/2012 - 15:51 | 2728502 dead hobo
dead hobo's picture

1st: There must be a mistake. Didn't GS recently state that Europe is the place to invest in equities and European companies that have US export commitments should be sold? How could this advice be compatible with a Greek exit from the Euro?

Seriously ... Why does analysis like the one from Citi treat Greece's exit as a static event. Greek debt will likely go into default immediately or soon afterwards when interest can't be paid or bonds can't be redeemed. This will impact all debt holders, significantly the ECB.This eventuality so often is ignored or dismissed. To me, it is center stage and those who ignore the consequences ... even if to say there will be no consequences ... are providing lightweight analysis.

Also, won't unlimited bond purchases from the ECB only create massive contingent liabilities to all Euro countries? Everyone knows these bonds will never be repaid unless the ECB loans the dependent countries money to make payments. Thus Germany and France and the others are simply allowing the ECB to encumber future generations for momentary political benefits. These countries will have to recapitalize the ECB or walk away from it.

And by 'recapitalize' I mean that Germany will be funding Spain and Greece directly, using the ECB as a strawman with a large time delay between ECB outflows and German reimbursements.

Wed, 08/22/2012 - 15:45 | 2728505 buzzsaw99
buzzsaw99's picture

If Citi is so effing smart why did they lose their whole market cap?

Wed, 08/22/2012 - 15:56 | 2728542 kito
kito's picture

+100................we are all so grateful for the federal govts generosity in sewing their cap back on citis brainless head............................

Wed, 08/22/2012 - 15:54 | 2728510 ebworthen
ebworthen's picture

See, the banks are trimming exposure and passing it to the public and non-bank private sector.

This is what all the feet dragging nonsense is about; delay and conquer.

Wed, 08/22/2012 - 19:32 | 2729008 malek
malek's picture

The banks cut exposure by 70%??

Hard to believe, as it must have been shifted onto someone else. Who is that entity, I would like to know.

Wed, 08/22/2012 - 15:48 | 2728512 Gloomy
Gloomy's picture


Wed, 08/22/2012 - 16:38 | 2728664 Tango in the Blight
Tango in the Blight's picture

Your ALL CAPS makes you so much more reliable! I wonder why not more people post in ALL CAPS...

Wed, 08/22/2012 - 15:50 | 2728519 tuttisaluti
tuttisaluti's picture

Who cares. This story is gettig old and boring. Do you know something new?

Wed, 08/22/2012 - 15:53 | 2728529 magpie
magpie's picture

The cynic in me says that all Europe in disaster stories have been tried and found wanting - the only way to level up is with "German default" and "France enters balkanization".

Wed, 08/22/2012 - 15:54 | 2728535 reader2010
reader2010's picture

You have to wait till Buffett has unwound his positiions first.

Wed, 08/22/2012 - 23:09 | 2729321 Captain Planet
Captain Planet's picture

Better yet, the unwinding of all things BH when Buffett crokes

Wed, 08/22/2012 - 15:55 | 2728541 daz
daz's picture

euro bullish... one less place to dump euros


Wed, 08/22/2012 - 15:57 | 2728544 youngman
youngman's picture

I wonder who bought those Greek bonds last week......????  at a lower rate no I wish I could blow money like that.....I would have 100 girls... a bottle of astroglide....and a six pack of beer....

Wed, 08/22/2012 - 16:05 | 2728573 johnQpublic
johnQpublic's picture

just a six pack?

Wed, 08/22/2012 - 16:09 | 2728580 dingoj
dingoj's picture

Can't you see?

in the EU: Grexit in September/October

in the US: QE in September/October

=> EUR down and USD down => EURUSD stays ~1.20

=> commodities go way up, but it's nobody's fault, right?

=> long fucking commodities till US election, pile up VIX while low

they think they can sandbox this, ha!


Wed, 08/22/2012 - 16:17 | 2728604 pd45
pd45's picture

Didn't Soros say pretty much the same thing back in June? He sure knows (or knows how to manip) currencies.

Wed, 08/22/2012 - 16:29 | 2728628 redd_green
redd_green's picture

aahhh don't believe all that Glenn Beck tripe.  Soros is a tiny flea on the back of an entire heard of elephants.   He's a charcoal salesman, not the guy starting the fires.   The herd is in there burning the buildings down, one by one.  Soros stands
there in the sidewalk waiting for one of the burning buildings to fall down, and
collects the charcoal for pennies on the penny and sells it for profit.   Nothing more.    But get a bunch of folks watching Fox News for a few weeks and they'll believe Soros is the root of all evil. 

Wed, 08/22/2012 - 16:25 | 2728620 redd_green
redd_green's picture

"and probably unbridgeable gap between the Greek government’s ability to quickly cut the fiscal deficit and implement major supply-side reforms and privatisations,"


i.e., the massive selloff of Greece to foreigners.    Too, too bad for Greeks that their children and grandchildren will be indentured servants in their own country.     Who will be the first to bid for the Parthenon?  China would like to make an amusement part out of it.

Wed, 08/22/2012 - 16:32 | 2728636 common_sense
common_sense's picture

Benny, starts printing already? Start now, and fuelling economy at Jacky Hole meeting, AS USUAL !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Wed, 08/22/2012 - 16:34 | 2728646 Sir Lancelot
Sir Lancelot's picture

how many of these pundits & experts have claimed a 'Greek exit' is imminent? I thought Greece was supposed to exit this month? or was it July? or wait, actually it was June... of 2011... there is just no credibility in forecasting this kind of stuff

Wed, 08/22/2012 - 16:35 | 2728649 Dick Darlington
Dick Darlington's picture

the current mix of fiscal austerity and supply-side reform will not return any periphery country to a sustainable fiscal path in coming years.


As long as the fanatics keep forcing the horror of €-cult there won't be any hope. That should be clear to even the most naive observators by now.

Wed, 08/22/2012 - 16:38 | 2728663 uncle_vito
uncle_vito's picture

Early as Sept?  No surprise here.  No surprise to anybody.

Wed, 08/22/2012 - 17:44 | 2728809 dracos_ghost
dracos_ghost's picture

Yeah, but September of what year?

What a fucking joke the Western economies have become.

Bring back online poker to the US. Better ROI.

Wed, 08/22/2012 - 16:47 | 2728681 the 300000000th...
the 300000000th percent's picture

Ah yes the return of the greexit, heard that one before

Wed, 08/22/2012 - 19:40 | 2729015 Julian
Julian's picture

Citi's just jawboning a short position.....

Wed, 08/22/2012 - 20:57 | 2729141 SwingForce
SwingForce's picture

GREECE has long ago sold the naming rights of its country to Goldman. You are not dealing with a country, but a LEECH. You are not bailing out a country, but a LEECH. You are not paying citizens, you are paying the holders of their debts. You are not paying Mastercard, you are paying Discover who has offered a 0% low introductory rate which will never get paid, but not to report the facts until Visa comes in and pays off Discover. 

Follow me to a bar on an island this summer, the bartender says "Yeah, the politicians screwed up the books, but you can still drink for free if you leave a big enuf tip." (He's really the owner, and he pays cash at Costco for the booze).

Greece, oops, can't use that copyrighted word for SINKHOLE of Money, but the Citizens who live there have effectively cut off the hands that feed them, for good cause. stay in the Euro, let the banksterz play their silly reindeer games of asset reallocation from the left pocket to the right, life will go on once they suck themselves to death. 

Wed, 08/22/2012 - 23:29 | 2729364 boiltherich
boiltherich's picture

Citi has seen the Grexit every month since 2009.  Not that their are wrong because I see it too, just trying to time it is a total bitch.

Thu, 08/23/2012 - 02:23 | 2729510 WaEver
WaEver's picture

I hope this guys' bonus is not tied to his predictions

Thu, 08/23/2012 - 08:20 | 2729725 Ian56
Ian56's picture

Obama will have something to say about that.

He doesn't want the Greeks to leave until after Nov 6th.

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