Deal or No Deal? Greek Exit Risk Persists, Say Citi, JPMorgan

So the Greece crisis is over? Not according to economists at Citigroup Inc. and JPMorgan Chase & Co.

Risks to the country’s euro membership still fester even after Prime Minister Alexis Tsipras surrendered on Monday to European demands for austerity to win as much as 86 billion euros ($95 billion) of aid.

Waving red flags were economists from JPMorgan Chase & Co. and Bank of America Merrill Lynch as well as those at Citigroup Inc. who coined the term Grexit three years ago.

“To avoid Grexit, Greece would require some degree of political stability and economic recovery, which the current proposal may fail to deliver,” the team led by Willem Buiter, Citigroup’s chief global economist, told clients in a report after news broke of a deal. “We maintain that Grexit remains the most likely outcome over the next one to three years.”

The analyst community split the risks two ways.

First, the immediate political problem of pushing an accord through Greece’s parliament and the national legislatures of some creditors. That’s needed to seal a bailout and, most pressingly, avoid the country defaulting on a July 20 payment to the European Central Bank.

After that, the longer-term question of Greece’s ability to grow its way out of debt servitude will determine if it sticks with the single currency in the absence of easier terms from its neighbors.

“It is hard to be at all optimistic about the prospects for Greece remaining in the euro area on economic grounds, and the political dynamic has a significant component of unpredictability,” said Malcolm Barr, an economist at JPMorgan in London.

Legal Hurdles

While the timetable for the coming weeks isn’t yet fully clear, it is starting to form.

Greek lawmakers will be asked on Wednesday to pass into law key creditor demands, including streamlining value-added taxes, broadening the tax base and curbing pensions. Tsipras will need the support of opposition politicians to make that happen.

After that, euro-area finance ministers will confer by telephone and, once they rubber-stamp the agreement, other national parliaments including Germany’s will start their procedures over the rest of the week. That may be enough to allow Europe to provide the Greeks with enough temporary cash to avoid defaulting to the ECB this month.

Then attention will switch to a longer-term aid package.

‘Drag On’

The latest plan is “not an actual deal,” Moritz Kraemer, managing director of sovereign ratings at Standard & Poor’s, said in an interview on Bloomberg Television’s “The Pulse” with Manus Cranny. “The negotiations will drag on, there will be a lot of nitty-gritty discussion.”

Even if aid is forthcoming, Greece is facing long-term questions about its economic future, all of which may sow social unrest and antagonism toward the euro project. Fresh austerity could end up making it even harder for the country to repay its debts, unemployment may rise and banks are still on the drip-feed of support from the ECB, so have limited capacity to lend.

“The money Greece will receive will not address the bigger issue facing the nation,” said Jim Leaviss, portfolio manager at M&G Investments, which oversees $400 billion. “Greece’s longer-term problem is not about liquidity. It’s about solvency, which is more difficult to solve.”

Some say Greece can remain in the euro region, this year at least. Ladbrokes Plc cut the odds of Greece keeping the euro this year to a record low of 1/12, meaning a bet of 12 pounds is required to win 1 pound.

The confusion around Greece’s prospects is illustrated by Citigroup’s own gyrations. Three years ago, its economists put the probability of Greece leaving euro within 18 months at 50 percent. They later raised it to 90 percent by 2014.

Proved wrong, the economists said at the end of last month that they were assuming Greece would stay even as Tspiras announced his referendum on austerity. A week ago, they revived the Grexit call.

Others nevertheless agree with Citigroup that there’s still a need for skepticism.

“We remain in the path of Grexit,” said economists at BofA Merrill Lynch. “Everything needs to go perfect to avoid it.”

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