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Look for a 'Grexit' Following Elections: Citi

Monday, 7 May 2012 | 3:53 AM ET

The risk of Greece exiting the euro zone have risen to as much as 75 percent, according to economists at Citi. Describing such an outcome as a “Grexit,” the Citi team said, however, that the chances of a broad-based break-up of the euro zone remain very low.

The Greek national flag is seen flying above the parliament building on Syntagma Square in Athens, Greece, on Thursday, Feb. 16, 2012.
Bloomberg
The Greek national flag is seen flying above the parliament building on Syntagma Square in Athens, Greece, on Thursday, Feb. 16, 2012.

The result of the election in Greece was inconclusive, but saw radical parties on the left and right make big gains at the expense of incumbent parties, which have angered voters with their handling of that country’s debt crisis.

With the chances of the formation of a unity or coalition government looking remote, it appears likely that Greek voters will be asked to vote again, something that could see Greece fail to meet the terms of its recent bailout by the so-called “troika” of the European Commission, European Central Bank and International Monetary Fund.

“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 percent of GDP by the end of June,” said Guillaume Menuet, an economist at Citi, in a research report on Monday.

Even with the support of new French President Francois Hollande, it is unlikely that Greece can obtain concessions on the terms of its current bailout, according to Menuet.

“The Troika is likely to delay the disbursement of the next tranche of the program. Note that for the second quarter of 2012, disbursements of 31.3 billion euros ($40.7 billion) from the bailout program are scheduled,” he said. “If Greece does not make progress, in a second step, the Troika is likely to stop the program. If that happens, the Greek sovereign and its banking sector would run out of funding.”

As a result, Greece would be forced to leave the euro area, according to Menuet, who said the chances of such an outcome are now rising fast.

“With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50 percent, and rises to between 50-75 percent,” he said. “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.”

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