Citigroup Chief Economist Sees Greece Leaving EMU on 1-1-13

Citigroup Chief economist Willem Buiter writes that Greece will leave the euro on the first day of 2013.

If it does happen, it won't be that far off and it will come buy surprise. Setting a date that is far off in the future would cause a bank run for certain. If you are Greek,would you want euros in your hands or devalued drachmas? If you fear the currency switch coming, you are going to pull your euros.That's why if there is a switch, Greeks will wake up one morning and learn they have in their accounts new drachma instead of euros.

That said, the most likely possibility is that the European Central Banks starts printing euros now, which will bailout Greece, short-term. If they don't bailout Greece then they are very likely to put a firewall around the other PIIGS. As Buiter puts it:

We expect that “Grexit” will be followed by far-reaching policy responses: we forecast the ECB will cut rates to 0.5% and resume its multi-year LTRO programme, a second package for both Portugal and Ireland, some kind of Troika programme for Spain, plus financial market support for Spain’s and Italy’s government bonds. We do not expect an early move to Eurobonds or full fiscal burden sharing. But, if deposit flight from periphery banks escalates, then EU policymakers may agree to a jointly-funded enhanced deposit guarantee scheme (DGS) — which aims to protect deposits against EMU exit and currency denomination as well as bank insolvency — plus a jointly-funded bank recapitalization scheme.

Bottom line: Major euro inflation is coming. The only thing that remains to be seen is if Greece will be part of the euro inflation package or whether they will be cut off to inflate on their own via the drachma.