Countdown begins: Grexit on 1 January 2013, according to Citi24 May, 2012, 15:34. Posted by Zarathustra
Tags: Euro Crisis
Now, Willem Buiter of Citi wrote that Greece will leave the European monetary union (EMU) in early 2013. That will be followed by, as many would have expected, rapid currency devaluation.
He is also expecting that contagion to other eurozone countries, saying that it is unavoidable. But it will be met by aggressive policy response, including, among others, the ECB cutting rates to 0.5% with even more LTROs.
A Grexit can be contained, he thinks, in a sense that it will not trigger other countries to exit the eurozone, but other countries will face the issues of higher costs of borrowing and recession. In any case, Grexit will not be the end of the Euro crisis, according to Willem Buiter:
There are many uncertainties, but in our new forecasts we assume that Greece will leave EMU in early 2013, followed by sharp currency devaluation, with a large drop in economic activity in 2013 and a modest rebound further ahead. We believe that sizeable adverse economic and financial contagion to other euro area countries will be unavoidable and this is already happening to an extent. We expect that “Grexit” will be followed by far-reaching policy responses: we forecast the ECB will cut rates to 0.5% and resume its multi-year LTRO programme, a second package for both Portugal and Ireland, some kind of Troika programme for Spain, plus financial market support for Spain’s and Italy’s government bonds. We do not expect an early move to Eurobonds or full fiscal burden sharing. But, if deposit flight from periphery banks escalates, then EU policymakers may agree to a jointly-funded enhanced deposit guarantee scheme (DGS) — which aims to protect deposits against EMU exit and currency denomination as well as bank insolvency — plus a jointly-funded bank recapitalization scheme.
We believe that, with such measures, Grexit can be contained in the sense that no other countries will be forced to exit EMU and the European banking system will continue to function. But, we believe that strained EMU sovereigns are likely to face high spreads plus poor credit availability, and the resultant economic weakness will cap revenues and lead to general fiscal deficit overshoots and rising debt ratios among many EMU countries. Grexit, if it happens, will not end the EMU crisis.
Now to be precise, Greece will leave on 1 January 2013, according to Willem Buiter. Other than that, however, he is increasing the forecast for 2012 global growth from 2.6% to 2.7%, while cutting 2013 global growth forecast from 3.0%to 2.7%.