A new report from Citigroup Inc. (NYSE:C) looks at the possibility of Greece and Cyprus leaving the European Single Currency, the Euro, in the coming months and years. The report finds that there is a high chance of both countries leaving the Euro in the future, though the immediate risk of such an event is lower.
According to the Citigroup Inc. (NYSE:C) report, there are numerous possible triggers that could lead to Cyprus or Greece abandoning the currency. The most prominent is the growing possibility that Cyprus will have to restructure its debt. An event like that could destabilize the entire European Union, and EU powers may prefer for Cyprus to do it on its own terms, rather than involve the Union in the debacle.
The report also says that both Italy and Spain will enter into some kind of European Stability Mechanism deal during 2013. Both countries are stuck in what Citigroup Inc. (NYSE:C) calls a vicious circle of poor growth, bad banks, and high unemployment. The problems for the Eurozone have not been dampened, and 2013 may be the most trying year for the continent yet.
Analysts also seem confident that the European Union, and the European Central Bank in particular, will try to make economic situations in peripheral countries less harsh in the next year. The bank expects that the ECB will lower its interest rates and that austerity policies followed in countries with debt problems are likely to be reevaluated.
The Euro area will stay in recession in 2013, and will likely suffer a recession in 2014 says the report. The pessimistic view espoused by the Citigroup Inc. (NYSE:C) is well backed by the analysts. Europe is not looking strong right now, and only a serious pick up in the U.S. economy, which doesn’t look likely, would help the ailing continent.
It is difficult to say how the market would react to Europe if Greece and Cyprus were to leave the Euro. On the one hand, it leaves a much stronger base of countries in the currency, making it less likely to suffer shocks from crises in these smaller economies. On the other hand, it makes it more likely that other countries will leave the currency, reducing the stability of the EU as a whole.
H/T CNBC
