No chance of Greek euro exit -hedge fund Toscafund

LONDON Fri May 18, 2012 1:22pm EDT

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LONDON May 18 (Reuters) - The "disastrous" consequences of a return to the drachma mean there is no chance of Greece leaving the euro, said hedge fund firm Toscafund.

The fund's chief economist Savvas Savouri said in a research note for clients that Greeks will vote for parties that back the euro and Greece's 130 billion euro ($165 billion) bailout in next month's elections despite the spending cuts, wage reductions, tax rises and privatisations that go with it.

"We are sure they (Greeks) are sure to see sense and opt for the unpleasant known rather than send Greece into an economic black hole," he said in the note this week.

"Once Greeks vote to remain euro-ized, with all the challenges attached, the debate over the possibility of any exits will end. Greeks will in effect go from the biggest threat to the euro's future to ensuring it has one."

Greek elections, portrayed internationally as a referendum on the single currency, are scheduled for June 17 after talks to form a government collapsed following inconclusive elections earlier this month.

The political crisis has raised the possibility of a Greek exit from the 17-nation euro zone, or "Grexit" as some economists have called the once unthinkable eventuality.

In January, Savouri said that a Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup.

In this week's note to investors, Savouri draws a parallel with New York City's debt crisis in the 1970s, when the city was forced into huge public sector layoffs before eventually receiving Federal funding and a decade later being "lauded as the template for other cities."

BOND YIELDS

Savouri said he expects Greek bond yields to rise as opinion polls ahead of the elections create "considerable unease". As a consequence, opinion polls in Greece should be banned to avoid accelerating panic, he said.

"What if in the approach to the 'referendum' opinion polls show a softening in support for the euro?" he said.

"In this case one can only imagine the damage inflicted on what is left of Greek bank deposits and share prices. The bank runs we have seen will move up a gear to a stampede and the only deposits left will be dormant accounts."

However, if Greece votes to stay in the euro, Savouri expects talk of it exiting to disappear and bond yields to fall again.

"Once Greeks opt for parliamentary parties that wish to work with their EU fellow members in finding a solution within the euro zone, downward pressure on Greek ... bond prices will be removed," he said.

A poll showed on Thursday that Greek voters are returning to the establishment parties that negotiated its bailout.

Savouri declined to comment on London-based Toscafund's own positions.

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