'Grexit' is now Citigroup's base case scenario
Citigroup has changed its view and now believes that ‘Grexit’ is the most likely outcome to the Greek debt saga, either through a short-term exit in the next few months, or over the next one to three years.
“The proximate drivers of our change of view are the announcement of the referendum, the imposition of capital controls and the emphatic ‘no’ outcome in the referendum. Background factors are the weakness of the economy, and the seeming inability of Greece and the creditors to reach a deal that contains both the substantial structural reforms and debt relief that Greece needs to stay in the euro,” it said.
It noted that by Sunday, we are likely to know whether there is a reasonable prospect for an agreement on a short-term bridge loan and a two to three-year programme of structural reforms, austerity and debt restructuring. The lack of any such deal would lead to a scrip currency soon and Grexit thereafter, said the bank.
“Even if the short-term Grexit risk is eliminated by such a deal, this is most likely to be no more than kicking a more than 5-year old can down the road,” it remarked.
Citi argued that Greece is unlikely, barring deep political and economic changes, to be able and willing to implement the conditionality of any two to three-year programme that can be agreed upon. “The willingness of the creditor institutions to condone yet another extend-and-pretend has been stretched to its limit."
“Even if we get a deal this Sunday (or before 20 July, when a €3.5bn ECB repayment falls due), Grexit therefore is more likely than not for the next two to three years,” it said.
The bank stressed that a short-term deal is nevertheless still likely, first because both sides are still reluctant to be the one formally pulling the plug on Greece’s Eurozone membership and second, because despite assertions to the contrary, neither side seems to be well-prepared for the operational, practical and legal aspects of ‘Grexit’.
Citi said there are two alternatives to ‘Grexit’.
One is a revitalisation of growth in Greece through a combination of debt forgiveness, new funding and political regime change.
“The other scenario is that of an unreformed Greece effectively becoming a long-term ‘ward’ of the Eurozone and the EU, with limited continuing external support, persistent relative and ultimately absolute economic decline and political instability prevented through the safety valve of large-scale emigration of the young, skilled and well-educated.”