Monday, November 26, 2012

Is Citi's "grexit" probability too high?

It is clear that Greece will need some form of debt restructuring, and the Eurozone leadership seems to be committed to getting that done (see discussion). Given the lack of cohesion, the Eurozone may just need a bit of a push from the markets in order to reach a consensus. But many still believe that not only will Greece need restructuring, but it will also exit the EMU as soon as next year. Citi research for example has assigned a 60% probability to "grexit".
CNBC: - "In Greece, debt restructuring is unavoidable whether Greece exits the euro area (our base case, with a 60 percent probability in the next 12-18 months) or not," Citi said. 
This probability figure feels quite high - particularly given that Germany seems to be committed to keeping Greece in (because they fear the "domino effect"). In spite of these forecasts, the prediction markets seem to be saying something very different. The latest Intrade odds for "grexit" by the end of 2013 are close to half the figure from Citi.

Any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2013

Those who believe Citi's forecast should be buying this contract right now. So far however those who bet on this event seem to prefer selling the contract.



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