Grexit being, of course, a Greek exit from the eurozone. (Also, an app for archiving and sharing Gmail threads. Bummer for them.)
The term comes from Willem Buiter and Ebrahim Rahbari at Citi, who are now leaning towards the “let them leave” argument:
First, we raise our estimate of the likelihood of Greek exit from the eurozone (or ‘Grexit’) to 50% over the next 18 months from earlier estimates of ours which put it at 25-30%. Second, we argue that the implications of Grexit for the rest of the EA and the world would be negative, but moderate, as exit fear contagion would likely be contained by policy action, notably from the ECB.
Citi had warned of ‘very high’ costs from a Greek exit only in September 2011. Notwithstanding support from the ECB – Buiter and Rahbari also reckon that European banks have now mostly insulated themselves from Greece and have offloaded exposure in the last 18 months. Some of the Citi comment on Greece’s economic fate post-exit is pretty chilling in its clinical tone: “For most other countries in the euro area, a Greek import collapse would seem to be a manageable inconvenience,” etc.
Buiter and Rahbari even argue that leaving the euro — which, let’s remember, isn’t provided for in any treaty and would have to be disorderly by definition – would be a “cathartic experience” for reforming the Greek state. We’re not too sure many Greeks would see it the same way.
In any case, Buiter and Rahbari say they expect a deal to be reached between Greece and its private bondholders, but that ISDA will declare the restructuring a credit event anyway, because to get the non-IIF creditors, including the ECB, to agree is likely to be ‘coercive’. Adding, in a footnote:
However, it is possible that a credit event would be avoided. This could be, because voluntary participation rates in the Greek PSI may be sufficient in the eyes of the Greek government and the official creditors, or because the original agreement of the official creditors and the ECB that the Greek debt restructuring would be voluntary would be respected.
Anyway, the Citi economists say that last week’s ‘Budget Commissar’ plan, and the response from Greek leaders, makes a Greek exit even more likely:
The growing impatience among the ‘core’ euro area member states with the Greek failure to implement agreed upon conditionality has led to a widely leaked German government proposal at the end of January. According to this proposal Greece would for its second bail-out surrender fiscal sovereignty to an unprecedented degree, up to and including the appointment of a European Commission Budget Commissioner (soon to be dubbed Budget Commissar or Czar) with the authority to override all important Greek spending and revenue decisions. The strong negative Greek reaction to this proposal – Deputy PM and finance minister Venizelos stated that Greece was being forced to choose between “financial assistance” and “national dignity” suggests that the demands from Brussels, Frankfurt and Washington DC may become hot issues in the forthcoming Greek parliamentary elections, likely to be held early in April 2012.
And yes, this is all very timely, given the new plan to earmark some bailout funds specifically for creditors, which was reported in the FT Monday night.
We haven’t seen a response to that plan from Greece, yet, but it’s certainly not stretching the boundaries of credibility to think it won’t be welcome. This is what Greece’s premier said on Monday as the talks on austerity measures failed to reach agreement (from Bloomberg):
Papademos told them he asked the Finance Ministry “to record accurately and realistically all the consequences of the country’s exit from the euro zone,” Panos Beglitis, spokesman for the socialist Pasok Party, said yesterday in an interview with Radio 9, according to a transcript of his comments e-mailed from Pasok.
Merkel, not much more flexible (in the FT):
“We want Greece to stay in the euro … but I also say there can be no new Greek programme if agreement is not reached with the troika,” Ms Merkel said. “All those who bear responsibility in Greece must know we will not deviate from this position.”
By Kate Mackenzie and Joseph Cotterill
Related links:
Breaking up is hard to do — but here goes, anyway – FT Alphaville
Otto’s revenge – FT Alphaville
‘Alles Klar, Frau Kommissar‘ – FT Alphaville