From Citi, another Grexit scenario | FT Alphaville

From Citi, another Grexit scenario

Grexit not this year. Maybe in 2013, with a 10 per cent drop in GDP. Continued financing from the IMF and the EU (through the Balance of Payments Assistance facility, possibly) to cushion the blow.

All those prognostications and more…

From the latest attempt by Citi’s Michael Saunders to factor a Greek euro exit into global growth forecasts. There is just a slight feeling of trying to impose order where there may ultimately be no order here. But here’s an interesting prediction:

Greece will immediately suspend interest payments on all government debt. But — in order to defer the recognition of losses among official creditors and as part of the package of EU/IMF cooperation post-Grexit — government debt will not be redenominated or written off immediately. With the new currency weakening and government debt largely in euros, the general government debt/GDP ratio will soar to about 400% in 2013. We pencil in eventual debt restructuring for 2015, aiming to cut the debt/GDP ratio to the EMU average (which at that stage will be about 95%) — and this will require large debt writedowns — probably covering both publicly held and privately held debt.

(Could Greece redenominate either the EFSF loans or the New Greek Bonds anyway? They’re both governed under English law now.)

(What are the costs to writing off the official debt in the euro versus out of it? Sorry to keep banging the drum on this. Also what’s happening to the bailout execution while the official creditors talk Grexit and Athens is leader-less? This is a very good post on that subject.)

Anyway, numbers to note: Citi see 20 per cent annual inflation from 2013 to 2014, and a 20 per cent decline in GDP from 2007 to 2016 (when they think the economy would start recovering).

There’s also a veritable shopping list of post-Grexit consequences for Citi: a Spain bailout, another LTRO, a gradual move to eurozone deposit insurance.

In fact Saunders has upgraded global growth up a bit in 2012, from 2.6 to 2.7 per cent. All these Grexit details might detract from a very grim outlook for the euro area economy though:

In total, we now expect that euro area GDP will fall by about 0.6% this year, and fall by about 0.7% in 2013, versus last month’s forecasts of -1.0% and -0.2% respectively. The upgrade for the 2012 forecast reflects the better Q1 data, while the downgrade to 2013 reflects a broad-based deterioration in the outlook among EMU countries. We expect that euro area real GDP will only regain the early-08 peak in 2016, significantly underperforming Japan’s “lost decade” experience from 1992.

Related link:
Eurozone grexit exposures charted – FT Alphaville