Greek Exit Would See Turmoil ‘Kick Off’ Again: Citi CIO
Associate Editor, CNBC
The risks of a Greek exit from the euro zone could include a spiral downward for the bloc that will include financial turmoil spreading to the rest of the euro zone’s peripheral economies, the chief investment officer of Citi Private Bank said on Tuesday.
“If Greece defaults and leaves the euro, what rational person will keep their money in a peripheral European bank account? At that point the whole thing kicks off again,” Richard Cookson told CNBC’s “Squawk Box Europe.”
Citi economists have put the chance of a ‘Grexit’ — as it is now being labeled — at between 50 percent to 75 percent, which Cookson said meant it was probably “going to happen.”
The contagion effect of that default would result in a run on banks in the rest of the periphery once Greece leaves, as investors seek to remove their deposits from the “next likely to fall,” he said.
“We have had a continual triumph of optimism over reality in this crisis over the last two or three years,” Cookson said.
Greek political leaders enter their ninth day of talks Tuesday in a last-ditch attempt to form a coalition government, which is considered unlikely to happen. That would leave the way open for more elections in June.
Opposition to the country’s bailout agreement has caused a political impasse, leading to calls for the country to leave the euro zone. European Union policymakers have insisted, on the other hand, that talk about a Greek exit is “nonsense” and “propaganda."
Richard Corbett, advisor to the EU Council President Herman Van Rompuy, told CNBC that “nobody was talking seriouslyabout a Greek exit.”
Cookson said Germany’s own position in Europe is increasingly under pressure as it struggles to contain negative rhetoric from around the region over its handling of the crisis.
“Germany is increasingly isolated in Europe, and this whole austerity versus growth, it’s a false dichotomy to the extent that when (European Central Bank President Mario) Draghi or (German Chancellor Angela) Merkel talks about growth, they’re talking about structural adjustment, not easing off on the brakes. It’s a cost-benefit analysis for the Germans,” Cookson said. “Do I carry on throwing good money after bad to keep this show on the road, or do I step back and say that what we have at the moment is unsustainable — if Greece leaves, maybe it’s more sustainable.”
There has been increased talk about more liquidity from the European Central Bank in the form of another round of its long-term refinancing operation (LTRO),which Cookson said might be an option for the ECB, but would be unlikely to provide long term support to the region.
“That’s probably right but all that happened was the foreign investors took advantage of the rise in prices of peripheral bonds to get out,” he said. “What you saw was the holdings of the domestic banking system increase a lot and holdings of foreign investors shrink a lot. I’m not sure how that helps in the long term.”