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Sudden Stop Thesis: What Are the Odds of Grexit Within Three Weeks?

Four years ago I thought odds of an eventual Grexit were nearly certain. Some people still don't believe so, while others are just beginning to understand the obvious.

Former Pimco Co-CEO El-Erian Sees 85% Grexit Odds With 'Massive' Contraction Coming.

Greece is heading for a "massive economic contraction" and is likely to be forced out of the euro zone, according to Mohamed El-Erian, the former chief executive at Pacific Investment Management Co.

"There's an 85 percent probability that Greece will be forced to leave the euro zone" in the next few weeks, El-Erian said in an interview from New York. "What we are seeing here is what economists call the sudden stop, when the payment system stops. The logic of a sudden stop is a massive economic contraction, social unrest and it's going to make continued membership of the euro zone very difficult for Greece."


Sudden Stop Thesis

While I still think it likely Greece will exit the eurozone, I will take the "over" line on a "few weeks". It is amazing how long these things drag out.

There are at least two wildcards in play that could prolong things. At the top of the list is Russia. Second in line is the US.

Why? Because the US does not want Greece to form serious ties with Russia.

Also, Merkel does not want Grexit on her watch.


Russia the Key

Meanwhile, and as I have been saying for months, Russia is the Key. Will Russia come to aid Greece with enough money and oil to enable Greece to hang on longer than a few weeks?

I suspect the answer is yes. If so, the price may be sanctions.

EU rules require unanimous agreement on sanctions. I expect Greece to play that card very well. Greece can and likely will torpedo EU sanctions on Russia by the end of the year.

Unless there is an immediate collapse in Greece starting now, look for Russia to keep Greece afloat until sanctions are lifted.

 

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