Huge Sense of Doom Among ‘Grexit’ Predictions
CNBC EMEA Head of News
Huge protests in Madrid, firebombs hitting tax offices in Italy, and voters in Northern Germany showing their anger toward an incumbent leader. Just another weekend in euro land, where the chances of economic recovery and political agreement on how to get there appear less likely by the hour.
Following a failure to form a new government in Greece over the weekend, fresh elections in June are in the cards, the result of which could be an outright rejection of austerity measures imposed by the European Union and International Monetary Fund . Talk of a Greek exit from the euro zone — the so-called “Grexit” — is rife, with economists at Citi putting the chances of Greece leaving the euro at between 50 percent to 75 percent.
Over at Credit Suisse, they are more optimistic that Greece will stay within the euro zone, but still see a 15 percent chance of Greece leaving the single currency.
Others now think a Greek exit is the only way for the country to have a fair chance of growing again.
“Grezxit path: election, default, exit, capital controls, deposit freeze, drachmatization of euro claims, depreciation, return to growth/jobs,” tweeted Nouriel Roubini of RGE Monitor on Sunday, following news that Greek coalition talks were going nowhere.
"The euro is seriously at risk," said billionaire investor George Soros on Saturday in Italian daily la Republica. "The consequences of a non-controlled implosion risks to be disastrous."
"The discussion is different if the crisis convulses Spain and Italy," warned the Soros. "In that case, without countermeasures, Europe would collapse."
Long-time euro bear Carl Weinberg, the chief economist at High Frequency Economics, said the chances are very high that the next Greek government will reject the terms of its March bailout by the EU and IMF.
“The risk of a hard default, regardless of whether Greece leaves the euro, is incalculable,” said Weinberg in a research note on Monday. “We expect EU-hardliners to back down rather than pull the plug on Greece’s lifeline, if only because the costs are both lower and knowable if Greece is kept alive.”
Weinberg believes EU leaders will extend Greek deadlines but predicts Greece will still miss key payments on its debt burden, running the risk of triggering credit default clauses. “Banks in Greece, all of them, will be the first victims of having to write off 160 billion euros ($77.3 billion) worth of Greek bonds still outstanding,” he warned.
With so much at stake, Weinberg predicted that Greece and the EU will find a way to avoid what could be Europe’s very own Lehman moment.
“Similar to Lehman’s failure, costs of a Greek default are unknown and unknowable until the curtain goes down,” he said. “We think core Eurolanders will wisely avoid these risks.”