Greek impasse raise fears of 'Grexit'

Citigroup's Willem Buiter has coined the term 'Grexit' as his bank raises the likelihood of a Greek exit from the eurozone. Photograph: Martin Argles for the Guardian

Word of the day is Grexit. It has been coined by Willem Buiter, chief economist at Citigroup, which now sees a greater chance of a Grexit – or Greek exit from the eurozone.

Against the backdrop of still to be concluded Greek talks over the latest bailout for the debt-choked country, Citigroup has raised its estimate of such an unravelling of Greece's situation to one in two.

It now sees a 50% chance of a Grexit over the next 18 months, up from its previous estimate of just 25-30%.

Explaining the move, former Bank of England policymaker Buiter and his Citigroup colleague Ebrahim Rahbari comment:

"This is mostly because we consider the willingness of euro area creditors to continue providing further support to Greece despite Greek non-compliance with programme conditionality to have fallen substantially."

On the upside they argue that the costs of Grexit to the rest of the euro area would be "moderate", as they "expect post-Grexit fear contagion would be contained by policy action, if needed."

They added: "In September, we viewed the likelihood and scale of exit fear contagion as much higher and the willingness of the euro area authorities to respond as lower."

But the fact the damage would be lighter makes such a Grexit more likely. And with Greece currently struggling to secure reform pledges from its public sector and its wider population, the willingness of overseas creditors to help has diminished somewhat.

This has led Buiter and Rahbari to state that: "The view that Grexit is more likely than not over the next few years has increased."

So what advice do they have for Greek policymakers wishing to stay in the eurozone? They may want to consider the controversial German plan leaked last month to allow a budget watchdog to be installed in Athens.

"The Greek government needs to exhibit a minimum degree of compliance with the fiscal and structural conditions of the bailout programme. Alternatively, it could choose to temporarily cede authority over certain budgetary decisions to European Union/Euro Area representatives," Citigroup concludes.