Greece will leave the euro zone next year and the country's new currency will "immediately fall by 60 percent," according to Citi chief economist Willem Buiter.
Greek officials have repeatedly stressed that the country will be running out of cash by the end of June, after which it would be unable to make debt payments and pay civil wages and pensions. An election is scheduled for June 17 after inconclusive results of the May 6 polls meant a government could not be formed.
The Troika of international lenders — the European Union, the European Central Bank, and the International Monetary Fund — are waiting to see what government will result from the elections next month before disbursing more aid.
"The elections (on June 17th) will not produce a viable government that can follow the troika plan, leading to a stalemate between the Greek government and official creditors, and to the suspension of EFSF-IMF funding,” Buiter wrote in Citi'slatest Global Economic Outlook.
However, analysts caution that a default wouldn’t automatically lead to an expulsion of Greece from the euro zone.
As UBS writes in a recent report: "There is plenty of precedent for defaulting inside a monetary union, so [a Greek] exit should not be assumed to be automatic."
Limited Cash Reserves
But Citi explains a Greek exitfrom the euro zone is closely linked with its limited cash reserves, which may be depleted well before the year end: “A Greek EMU exit could be triggered by the government’s need to print money to cover its spending.”
Citi adds that Greece's new currency will immediately fall 60 percent versus the euro and “remain depreciated by 50 to 60 percent for the next five years.”
Based on this scenario, the bank believed that Greece’s real gross domestic product will shrink by about 10 percent in 2013. However, it could rebound by 4 percent to 5 percent in 2015-2016, as gains in cost competitiveness revive exports, especially tourism, Citi wrote.
Addressing Spain’s banking sector troubles, Citi expects “some kind of troika program for Spain to be agreed this year or in early 2013." Its main goal will be to fund a recapitalization of the banks, though there is a chance it could be used for the funding of the fiscal deficit as well, according to Citi.
On Thursday, Spain’s Prime Minister Mariano Rajoy reiterated the country had no “interest and no need” for a recapitalization of its banking sector through the European rescue fund.
Hours later the Spanish economy minister Luis de Guindos confirmed that Bankia, the country’s fourth-biggest lender, will be fully nationalized, with a 9 billion euros ($11 billion) capital injection through Spain's state-backed bailout fund.
—By CNBC’s Carolin Schober