Kiwi markets first to react to poll results
New Zealand’s financial markets will be the first in the world to react to the Greek election result due out today, which could plunge the world into a new financial crisis.
As Greeks went to the polls last night, it appeared to be a close race between the two biggest parties, the radical-Left Syriza, which wants to renege on the bailout deal and austerity measures, and the conservative New Democracy party, which would adhere to bailout pledges.
ANZ chief economist Andrew Bagrie said the reaction to the election result from the New Zealand financial markets would be ‘‘quite telling, I suspect, because it is going to be the first market when we start getting the news’’.
‘‘I have got a suspicion that we are going to be scratching our heads, because I don’t think either one [party] is going to have a mandate in either direction,’’ Bagrie said.
The markets would be volatile during the next week as investors assessed the implications of the result.
The currency market and sharemarket appeared to shed some of their worst fears last week as it became evident that a backup plan might be in place to deal with the worst-case scenario.
Equity markets had generally improved slightly late last week while the New Zealand dollar has gained nearly US3.25c, including US0.62c on Friday.
‘‘It does look like markets have taken a little bit of confidence that there might be a backup plan sitting behind the scenes. There was a less profound aura of pessimism.’’ However, they remained extremely concerned, Bagrie said.
Massey University economics professor Christoph Schumacher said if the election led to Greece leaving the euro, it would be a bigger financial disaster than the collapse of the Lehman Brothers bank which led to the 2008 global financial crisis.
The effects would be felt around the world, including New Zealand, Schumacher said.
‘‘New Zealand got through the last global financial crisis reasonably well because of China’s increasing appetite for New Zealand dairy and agricultural products, but the situation is different this time.
‘‘China’s economic growth is slowing down and so is its demand for New Zealand goods. The next economic crisis could hit New Zealand a lot harder,’’ Schumacher said.
The cost of Greece defaulting on its debt and leaving the euro has been estimated at 1 trillion (NZ$1.6t) by the Washington DCbased Institute of International Finance.
Schumacher said if it was cheaper to prevent a Greek default, then there could be a viable alternative option.
The European Union could write off half of Greece’s debt ‘‘as a gift’’, costing about 100 billion. Greece would need to strictly enforce new tax laws and limit budget deficits.
‘‘In return, the EU would create a European fund to provide stimulus packages for Greece, as well as other countries like Ireland, Portugal, Spain and Italy, whose economies are in recession.
‘‘Surely, such a stimulus package would cost the EU less than 1 trillion, and also help the troubled economies grow,’’ Schumacher said.
UBS Securities says its economic modelling shows that ‘‘the cost and benefits from default and exit scenarios suggests that Greece will remain a fully fledged member of the euro’’.
Under UBS’s worst-case ‘‘black skies’’ scenario, the resulting extreme instability would reduce the eurozone’s economic growth by 4.25 per cent after a year.
World economic growth would slide to 1.3 per cent compared with UBS’s 3.5 per cent growth forecast for next year.
That figure suggested a global recession, but it would not be as bad as the downturn of 2008 and 2009, UBS said.
Australia, the United States and Japan would be least exposed to the turmoil and China had the financial clout to adapt. But the economic costs were high enough ‘‘to convince European policymakers that exit scenarios will be avoided at all costs’’, UBS said.