Load shedding, Marikana, Nkandla … but at least we’re not in Greece
OVER the past week, the contentious bailout programme that Greece has depended upon for the past five years has expired. Greece became the first developed country to fall into arrears with the International Monetary Fund (IMF) over its failure to repay the approximately € 1.6 billion (R19.6bn) owed.
This is by far the largest default the IMF has faced and Greece is now listed next to countries such as Zimbabwe, Cuba and Sudan for non-payment. The developments have increased concern about the likely future of Greece.
Since the start of the Greek crisis back in 2010, doomsday scenarios have been frontpage news on a regular basis; each time causing market turbulence.
This is the case again, but this time it feels like we might be getting closer to some change in one form or another. What might look like speculation may, over the next few days, offer more clarity.
It is important to note, however, the concerns being raised today are no different from those which grabbed headlines in 2010, such as:
What will happen if Greece exits the EU?
Will there be contagion to Europe and the rest of the world?
What is the likely effect on banks, capital flows, currencies and financial markets?
Should I do anything to my portfolio to avoid permanent loss of capital?
Fortunately, compared to five years ago, the potential effect from any of these concerns has reduced significantly. Why?
The answer is it’s not really about Greece, but rather about financial contagion to the rest of the world. Greece is too small a country to have a significant effect on the fundamental economic progress of Europe or the rest of the world, for that matter.
Greece’s share of the world economy has fallen from only 0.6 percent at the beginning of the crisis to just 0.3 percent. Greece is today smaller than countries like Romania and Peru and the links between Greece and Europe are less relevant than before the first exit fears surfaced in 2012. Exports to Greece from most major economies are minimal.
Compared with five years ago, the risk of financial contagion has been contained significantly.
Excluding Greece, most troubled European countries made significant progress since 2010 and are in a better position today.
Importantly, many banks in Europe (the channel through which contagion will spread) have recapitalised and are in a healthier position than five years ago.
The exposure of European banks to Greece has also declined significantly over the past few years, from close to $300bn to less than $50bn
The bulk of Greece’s public debt is now also held by public creditors, who are better placed to bear any losses than the private sector.
This should reduce the risk of contagion even further.
Furthermore, the launch of the European Central Bank (ECB) quan- titative-easing programme earlier this year has provided a significant liquidity injection which will alleviate many of these risks.
The ECB is also in much stronger position today to continue with support measure if needed compared to a few years ago.
Having said this, Greece’s fate remains uncertain.
Over the next few days we are likely to see renewed turbulence across global financial markets.
To say anything about Greece’s future at this point will only be speculation.
Many things need to take place over the next few weeks and there are a number of possible outcomes to the situation. However, even if Greece exits the EU, authorities in Europe have likely acted in advance to ensure there is limited contagion to the rest of the world and will continue to do so (as they did this week by imposing capital controls on Greek bank withdrawals).
What does this all mean for emerging markets such as South Africa?
The direct links between Greece and the rest of the emerging markets are fairly limited.
Some emerging markets in Europe might be more exposed, but the conclusion is the same as for the rest of the world.
Greece is too small to have any real economic effect on emerging markets and the real risk is rather whether this triggers large-scale financial contagion.
For example, exports to Greece as a percentage of economic size are on average less than 0.05 percent for most major emerging markets.
Hence, there is no way Greece can move the economic needle for these countries.
Emerging markets need investor appetite to remain positive so as to support capital flows into these markets. Financial contagion from the Greek crisis might have a significant negative effect on many emerging markets, given most are already struggling with structural issues and financial vulnerability.
The most vulnerable emerging markets would be those that depend most heavily on external financing.
These include Malaysia, Hungary, Turkey and South Africa.
For South Africa, given the country’s larger current account deficit, if foreign capital flows were to reduce meaningfully owing to the Greek contagion, the rand would be likely to take a severe blow.
However, apart from some shortterm turbulence hitting equity markets and currencies over the next couple of weeks, it looks likely that the crisis should be contained within Greece.
As a result, assuming the problems in Greece remain contained, developments elsewhere – notably the slowdown in China and the potential for interest rate hikes in the US – will continue to have a greater bearing on the outlook for global financial markets, including South Africa, over the longer term.
Maarten Ackerman is a Citadel advisory partner and investment strategist.