What ‘Mr Grexit’ Did Next

3/4/2014

By Katie Martin

Love it or hate it,when Jim O’Neill coined the  ubiquitous term BRICs, it opened the floodgates  that led to copycat MINTs, PICKS and M1KEs from analysts around the world. (See also: TOWIE. Not the TV show ‘The Only Way Is Essex’, but ‘The Only Way Is Equities’.)

Similarly, the man to thank for ‘Grexit’ is Willem Buiter, chief economist at Citigroup, who in a note penned with colleague Ebrahim Rhabari, invented that gem in 2012 to help him explain his belief in the strong likelihood of a Greek exit from the euro.

Cue Brixit, Fixit, and a range of other tongue-in-cheek acronyms too numerous to list.

At one point, the bank saw up to a 75% chance of Grexit, and even put a date on it: Jan 1, 2013.

The day came and went.

So what is he up to now?

At a presentation on the 16th floor of Citigroup’s London office Thursday, overlooking the U.K.’s dust cloud, Mr. Grexit revealed no new word mashes.  He was not in doom-and-gloom mode. He reckons global growth will rock in at just over 3% this year, roughly in line with consensus.

But he does think investors are overlooking some scary risks, including a Chinese hard landing and an escalation of geopolitical tensions.

“I don’t see these things being priced. Good news, bad news or no news, the markets just keep going up,” he quipped.

To break that down a little, on Russia and Ukraine, he said:

“The market seems to think it is bad for Russia and Ukraine, and that’s it. But if Russia goes into Eastern Ukraine, we will have serious sanctions. That would be disastrous for Russia, and it could also push Europe back into a recession.”

As a side note, Mr. Buiter’s energy-focused colleague Seth Kleinman also touched on the possibility that Russian energy exports could be seriously curtailed if heavier sanctions were brought in. “Russian volumes are simply irreplaceable,” he said. “Simply irreplaceable. You cannot replace them. There’s no way you can replace Russian volumes. There’s simply no way you can lose this.” Everyone got that?

On China, Mr. Buiter frets about the enormous share of GDP tied up in construction. “I’ve never seen a country get out of that without a recession,” he said. “There’s a material risk of 3% to 4% growth in China. I don’t see that being priced.”

On the bright side, the euro area economy “has a pulse,” he said. “Performance is better. But not good.” Markets have thrown any notion of sovereign risk out of the window ever since ECB President Mario Draghi’s ‘whatever it takes’ moment, he said, leading to “ludicrously” low spreads on peripheral debt.

“The markets want to believe,” he said. “They have faith. Faith is good, but it is bad in economics,” he said.

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