Bank that coined Grexit no longer expects it

16/9/2016

By Mehreen Khan

The bank that invented the term “Grexit” no longer thinks a eurozone exit is on the cards for Greece as multiple crises lap on the shores of the EU.

Citigroup, whose chief economist Willem Buiter coined the term in 2012 to describe the possibility of Greece becoming the first country to leave the single currency, has removed a Grexit from its baseline forecast over the next one to three years.

The bank’s call comes as the eurozone’s largest debtor nation is struggling to meet the latest set of conditions needed to qualify for its next injection of bailout cash agreed with international creditors earlier this year.

Athens has satisfied just two of the 15 outstanding milestones needed to receive €2.8bn of funds set to be released this autumn. The measures, which were set to be finalised over the summer, cover everything from labour market reforms to the creation of a controversial privatisation fund sequestering Greek assets.

But analysts at the US bank, led by Giada Giani, think a host of other distractions — from the refugee crisis, a botched coup in regional neighbour Turkey, and the Brexit vote — will ease the European creditor squeeze on the leftwing Syriza government.

“The political backdrop both in Greece and in Europe has become less conducive to very negative outcomes”, said Ms Giani.

“We therefore remove from our baseline scenario our longstanding call for Greece leaving the euro area in the next one to three years”.

Citi’s analysts still think the prospect of major debt relief — tentatively agreed by Greece’s international creditors in May — is a significant sticking point, seeing no meaningful restructuring of Greece’s €248bn debt pile on the cards before Germany heads for national elections in late 2017.

With EU leaders gathering for their first show of unity after the Brexit vote in Bratislava on Friday, one senior European policymaker said this week: “Greece is not really an issue for the eurozone any more. There is no longer any spillover to the rest of us”.

Greece’s stalling is not set to bring the country to the edge of another solvency crisis, as it faces no major debt repayments before March 2017, added Ms Giani. Instead, Athens will face its next hurdles when €6bn of maturing bonds are due to its creditors in July 2017.

Despite falling levels of popular support, Greek prime minister Alexis Tsipras has also grown increasingly emboldened in the face of Brussels’ demands for austerity and fiscal rectitude, holding a “mini summit” of the eurozone’s southern member states in Athens last week.

George Katrougalos, Syriza’s labour minister, revived a war of words with the International Monetary Fund last week, accusing the fund of taking “extreme” positions on the country’s labour market reforms.

Having clashed with its European partners, the IMF has yet to commit any funds to the country’s third international bailout. It will carry out its own debt sustainability analysis before deciding on whether to continue its involvement in the country — a key demand from Angela Merkel’s Germany.

Officials from the fund, who returned to Athens this week, will also be conducting their first annual review of the Greek economy — known as an “Article IV” report — in three years later this month.

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