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A Greek flag flies as thick smoke from a forest fire rises a few miles east of Athens August 25, 2007. (REUTERS/YIORGOS KARAHALIS/REUTERS/YIORGOS KARAHALIS)
A Greek flag flies as thick smoke from a forest fire rises a few miles east of Athens August 25, 2007. (REUTERS/YIORGOS KARAHALIS/REUTERS/YIORGOS KARAHALIS)

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Citigroup sees rising threat of Grexit (Greece euro exit) Add to ...

These are stories Report on Business is following Monday, Feb. 6, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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The Grexit Citigroup analysts are warning of the rising threat of Greece leaving the euro zone, so much so that they've dubbed it Grexit. It doesn't flow quite as well as Merkozy, but it gets the point across.

As the Greek crisis refused today to give any ground, Citigroup's Willem Buiter and Ebrahim Rahbari raised the likelihood of a Grexit to 50 per cent over the next year and a half. That's up from their earlier call of 25 per cent to 30 per cent, and largely due to the fact that they believe the support of euro area creditors to keep pumping in money has fallen markedly as Athens, which said today it plans to slash 15,000 public sector jobs, fails to meet its commitments.

The analysts believe Greece will actually strike an "orderly but most likely coercive" debt restructuring in the current talks with bondholders, the private sector involvement, or PSI, under its plan. They also expect agreement with the Troika - the International Monetary Fund, European Union and European Central Bank. Talks on both fronts are now taking place, and weighing on markets.

" Grexit would likely take place in a context where Greece is no longer willing to make the minimum efforts necessary to be judged to be in compliance with the fiscal and structural reform demands of the Troika," the Citigroup observers said.

"Greece would not just have to fail to comply in substance, but would have to be sufficiently blatantly non-compliant to deprive the Troika of the fig-leaf of an ‘honest-albeit-insufficient effort to comply.’ Technically, given the lack of any treaty-based mechanism to expel member states, Grexit would be voluntary, but it might well be triggered by diminished willingness on the part of the Troika to bend the rules to allow it to continue to pay out the tranches under the Greek Troika program."

"Grexit would effectively start with the urgent passage of a currency law through an emergency decree by the Greek government of the day," they added.

"This law would stipulate one or more conversion rates between the old and the new Greek currency (which we will call the ‘New Drachma’). It is likely that at the same time capital controls would be introduced by Greece, aimed at stopping euro-denominated financial instruments covered by foreign law from leaving Greece."

It's interesting to note that the Citigroup analysts don't paint a doom-and-gloom scenario for when and if that happens.

"We think that the costs of Grexit to the rest of the euro area would be moderate, as we expect post-Grexit exit fear contagion would be contained by policy action,"

Regardless of what happens, they believe another debt restructuring would be in the cards.

Athens is said to be close in talks with bondholders, which would result in losses of up to about 70 per cent.

"The PSI is ready to roll in Greece but there is tension between the Troika and the Greek government about the need for further fiscal reform as a condition for the next tranche of bailout money being handed over," said Kit Juckes, the chief of foreign exchange at Société Générale.

"Popular resistance to additional austerity is growing and the focus is slowly shifting to when and what kind of ‘haircut' official lenders to Greece (which really means the ECB) will face."

Indeed, two major Greek unions today called for yet another 24-hour walkout to protest more austerity measures. The Greek people have clearly had more than enough, and this is not lost on the politicians.

"Greece’s finances remain the main focus of market concern and the weekend didn’t appear to bring the much promised-for resolution any closer, with still no real signs of an imminent agreement on the new €130-billion bailout that the country needs to avoid a default in March," said CMC Markets analyst Michael Hewson.

"The Troika continues to press the Greek government for more reforms, as well as further wage cuts which the main opposition leaders remain opposed to," he said. "Due to the fiscal deterioration in the Greek economy since the bailout was agreed last year there is now a gap of between €15-billion and €20-billion, which the Troika are insisting has to be met with further budget cuts. With the ECB remaining opposed to any form of changes with respect to the value of its holdings the impasse appears intractable."

Behind the Caterpillar shutdown The shutdown of a Canadian plant in uncertain economic times isn't a first for Caterpillar Inc. . And, lest others follow suit, Canada must draw a line in the sand and let the multinational know that if it wants to do business in our country, it has to play by our rules.

To recap, as The Globe and Mail's Greg Keenan reported, Caterpillar's Progress Rail Services said Friday it's closing its 62-year-old Electro-Motive Canada operation in London, at a cost of some 700 jobs, including management, and moving the work to other plants in North and South America.

It had locked out members of the Canadian Auto Workers at the beginning of the year, demanding deep concessions to which the union said no. The shutdown stoked more than just a little controversy as the giant manufacturer had just reported a record profit of $4.9-billion (U.S.) for the year and sales that topped $60-billion. And at the same time that Indiana became the first state in some 10 years to enact "right to work" legislation.

Caterpillar didn't specify the region to which the jobs are moving, but the destination for at least some of the work seems clear. It held a job fair in Muncie, Ind., on the weekend, where, according to reports, it's offering hourly wages of about half the rate in London.

No doubt the company has a point about costs, an issue not only for the union but the country as well, but Caterpillar's approach is a vicious one that has no place in Canada.

Electro-Motive said in a statement that the operation's cost structure was not sustainable and that efforts to negotiate a "competitive" labour contract weren't successful. (When you demand pay cuts of up to 50 per cent, they're not likely to be.)

The company at best paid lip service only to the concept of collective bargaining. Of course it was going to fail at the bargaining table.

There was no mediation in the dispute, according to the union. Months ago, there was conciliation, which resulted in what is known as a no-board report, part of the process leading to when companies can legally lock out and when unions can strike.

The union took a strike vote much later and, said Bob Orr, assistant to the CAW president, offered to continue to work under the same pay and conditions while meeting with a mediator, a third party who attempts to settle labour disputes.

Note these comments:

"All facilities within EMC, EMD and Progress Rail Services must achieve competitive costs, quality and operating flexibility to compete and win in the global marketplace, and expectations at the London plant were no different," Billy Ainsworth, the CEO of Progress Rail, said in a letter to employees.

It goes hand in hand with the statement last week from Indiana Governor Mitch Daniels, who heralded his new law as not "a magic answer" but one that will "see more jobs and opportunity for our young people and for all those looking for a better life."

Caterpillar has done this before, in a similar era of high unemployment in which governments scramble to lure jobs. In 1991, the company announced the shutdown of its Brampton, Ont., operation, citing cheaper labour in North Carolina.

Perhaps government and corporate leaders should look to the example set by the Mark's Work Wearhouse unit of Canadian Tire Corp. , which removed Caterpillar-branded boots from the shelves in London this weekend.

We need to hear from the federal and provincial governments, our chambers of commerce, and the Canadian Council of Chief Executives.

RBC cuts compensation The chief executive officer of Royal Bank of Canada and other executives at Canada’s largest bank saw their pay drop in 2011, a year in which the bank increased revenue but took a significant writedown from the sale of its U.S. retail bank operations, The Globe and Mail's Grant Robertson reports.

CEO Gordon Nixon made $10.1-million in total direct compensation last year, down 8 per cent from 2010, according to the bank’s proxy circular, which was made public today.

Hasbro profit dips The United States and Canada appear to be letting down Hasbro Inc. .

Hasbro's profit dipped in the fourth quarter, though revenues increased, and the company today cited its overseas businesses as areas of growth last year.

Hasbro earned $139.1-million (U.S.) or $1.06 a share, diluted, in the fourth quarter, down slightly from $140-million or 99 cents a year earlier. Revenue increased 4 per cent to $1.33-billion.

"In 2011 we delivered strong growth in our international business driven by continued investments in advancing our global capabilities," said chief executive officer Brian Goldner.

"However, we did not meet our expectations for growth in the U.S. and Canada segment, as we experienced weaker demand than we had anticipated, especially post-Thanksgiving, including challenges in the games and puzzles category. We have taken significant steps by putting new leadership and new plans in place to re-accelerate growth and innovation in both of these important areas."

GM sets high bar In a sign of just how remarkble the turnaround at GM has been, the auto maker is now aiming for an annual profit of more than $10-billion (U.S.).

The Wall Street Journal reports today that General Motors Co. will probably post a 2011 profit of some $8-billion. But even more telling is that Daniel Ammann, its chief financial officer, told the newspaper that it's looking to boost its margin to 10 per cent.

As the Journal notes, the auto maker has seen strong gains in China, as well as its home base in North America, where it has slashed costs and added thousands of jobs since its short stint in bankruptcy protection.

What to watch for this week Three major central banks meet this week amid a muddied economic picture, including the Reserve Bank of Australia on tomorrow, the Bank of England on Wednesday and Thursday, and the European Central Bank on Thursday. Economists believe the Australian central bank will cut its benchmark rate for a third time, by one-quarter of a percentage point, while British policy makers hold the line, and ECB officials probably stand pat as well.

There is, however, the chance of another rate cut by the ECB.

"Despite recent signs of stabilization in Europe and better U.S. data, central banks will likely remain proactive and provide further stimulus and overall activity remains subdued," said Benjamin Reitzes of BMO Nesbitt Burns.

In the markets, several major companies are on tap to report quarterly results, including BCE Inc. and its rival Telus Corp., Agrium Inc., Husky Energy Inc., Manulife Financial Corp., Teck Resources Ltd., Thomson Reuters Corp., Precision Drilling Corp. and the two big airlines, Air Canada and WestJet.

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