Citi: Probability of Greek’s Euro exit rises to more than 50%7 May, 2012, 18:47. Posted by Zarathustra
Tags: Euro Crisis, Greece
After the expected but boring victory of François Hollande and the inconclusive Greek election, how things stand in the Euro crisis right now?
Greece, which seemed to have been to the worst and cannot go even worse, is indeed going worse. As noted earlier, as the Parliament became as fragmented as it could get, forming a coalition government which is pro-European seems to be difficult. According to Citi’s latest note, if a government cannot be formed, another election is likely, and the earliest possible date for another election would be 10 June.
The political turmoil will most certainly be negative for the implementation of the Troika programme. And according to Citi, the next tranche of the bailout could be delayed, and the the Troika programme could be stopped altogether. Then, without money, Greece will be forced out of Europe, and the probably of a Greek exit is now judged to be bigger than 50% (emphasis mine).
If no agreement on a government coalition can be reached, another round of elections is likely. The earliest possible date for a second round of elections would be June 10. Without a functioning government, it seems highly unlikely that Greece would be in a position to present the Troika with plans for additional budget savings worth 7% of GDP by the end of June.
While there might be room to change some details of the MoU, to us, it looks very unlikely that the new Greek government will be able to obtain larger changes of the programme details with the Troika, even with the influence of Mr. Hollande on the European side.
Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme. Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme. If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%. However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. We continue to expect that in reaction to Greece leaving the euro area, more far reaching measures from governments and the ECB would be put in place.