Greece to leave the Eurozone by Q3, says Schroders

Greece and the EU are playing a game of financial chicken with both sides talking tough ahead of the general election on June 17th, says Keith Wade, chief economist at Schroders.

“We do not see a happy outcome and have brought forward a Greek departure from the euro to the third quarter of this year as the European Union and European Central Bank cut off funding,” he said.

The asset management company expects the ECB and central banks around the world to pump liquidity into the system, limiting contagion and preventing any further break-up of the euro.

“EU policymakers may also need to offer guarantees to bank account holders and adopt a more pro-growth stance to reassure markets. Policy will need to remain loose to support the remainder of the periphery where recession is expected to drag on into 2013,” Wade added.

Despite the negative European scenario, with the US continuing to grow, and China avoiding a hard landing, the world economy is not expected to drop back into recession.

“For a double dip we would need to see one of our two scenarios: a wider Euro break-up, or political deadlock in the US such that the economy falls over the fiscal cliff,” he said.

Meanwhile, the eurozone managed to avoid recession in the first quarter largely thanks to better than expected numbers from Germany.

“However, many members are in technical recession, with Italy faring the worst or the peripheral group. The big risk for Europe will be whether contagion becomes a bigger issue for Spain and Italy following the events in Greece,” said Azad Zangana, European economist at Schroders.

Banking deposits have been flowing out of Greek banks for some time, but are now leaving Spain too.

“For now, we sit and wait for policy makers to take action, with the knowledge that we may need to see markets deteriorating further before relief is provided. This keeps the risk of a disorderly outcome high, and we cannot be totally certain that when the flood of liquidity comes, whether it will be enough to put out the fires,” he said.


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