Citigroup Inc. said there's now a 90 percent chance that Greece will leave the euro in the next 12 to 18 months, with prolonged economic weakness and spillover for the currency bloc.
In an analyst note, Citigroup updated its forecast for a Greek exit from the 17-nation currency union from a previous estimate of 50 percent to 75 percent, and said it would most likely happen in the next two to three quarters. Specifically, the bank assumes a Greece exit would occur on Jan. 1, 2013, while saying that is not a forecast of a precise date.
Greece's so-called troika of international creditors, the European Central Bank, the European Commission and the International Monetary Fund, are in Athens this week amid doubt the country will meet its bailout targets and reluctance among Germany and other euro-area states to put up more funds should Greece fail to do so.
“Before the Greek election, the troika members were willing to be patient, while Greece slipped off-program in expectation that the election might produce a government that was able and willing to get the programme back on track,” Michael Saunders, chief western European economist at Citigroup, in London said in the note. “It is now fairly clear that these hopes have not been fulfilled.”
Worsening turmoil in Spain and Italy may make European politicians less willing to give further help to a country that keeps on missing its targets, Citigroup said. Citigroup said that even with the Spanish bank rescue, both Spain and Italy are “likely” to need some form of full bailout by the end of 2012.
Yields on Spain's two-, five-, 10- and 30-year government securities climbed to euro-era highs this week, with the 10-year bond returning as much as 7.69 percent on July 22. The extra yield that investors demand to hold Italian 10-year bonds over German bunds on July 24 rose to the highest since Prime Minister Prime Minister Mario Monti took power on Nov. 16.
“Our base case is for prolonged economic weakness and financial market strains in periphery countries, spilling over into renewed recession for the euro area as a whole this year and the next,” the Citigroup note said.
In Greece, Prime Minister Antonis Samaras meets European Commission President Jose Manuel Barroso at 5:30 p.m. local time today. The country risks running out of money without the disbursement of a 4.2 billion-euro payment ($5.1 billion) that was due in June as the first part of a 31 billion-euro transfer.
Policy makers are now talking openly about the possibility that the country will need another bond restructuring. Evangelos Venizelos, leader of Greece's Pasok party, said July 7 that a write-down of bonds held by the ECB should be one of the steps to further cut the country's public debt.
“There still looks to be a considerable, and probably unbridgeable, gap between the reform measures and fiscal improvements insisted upon by the creditors and those that are politically and economically achievable in Greece,” said Citigroup.
Bloomberg News
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