Greek debt woes unlikely to turn into global crisis
GREECE’S economic woes are unlikely to have a big impact on the South African economy. Financial experts have said the Greek crisis is mainly contained to eurozone countries. David Zahn, head of European fixed income at the Franklin Templeton Fixed Income Group, said the economic fallout of the crisis appears to be contained to Greece and the likelihood of it spreading to other eurozone economies in the longer-term seems to be limited.
He said the Greek referendum, set to take place on Sunday, allowing the public to vote on proposals put forward by the country’s creditors, effectively brought an end to negotiations between Greece and representatives of its creditors, the European Commission, the European Central Bank and the International Monetary Fund (IMF).
“In our eyes, the Greek government’s approach has created additional animosity that probably was unnecessary. But what is more significant, is that the ballot scheduled to take place this Sunday presents little chance of bringing the situation to a conclusion.”
Zahn said the initial reaction of the markets to the surprise referendum announcement was quite well contained and markets seem to have remained relaxed.
“Most commentators seem to feel that the probability of ‘Grexit’, a Greek exit from the eurozone, has increased, particularly in light of Greece’s failure to make the €1.6 billion (R21.7 bn) repayment to the IMF that was due on Tuesday. The European negotia- tors seem to have made it clear that if the Greek people vote ‘no’ in the referendum, in other words, rejecting the proposals put forward by the creditor institutions would seem to signal that the Greek people do want some kind of deal, but the deal they’re voting on no longer exists.”
He said the Greek authorities would therefore have to renegotiate.
Zahn said that even if Greece were to leave the eurozone, its economy represents only a small percentage of the eurozone’s gross domestic product (less than two percent) and a lot of firewalls have been built in Europe to try to minimise contagion among other euro area countries.
Nedbank Group’s senior economist, Nicky Weimar, said emerging markets have been relatively calm so far.
“The default aggravated niggling worries, but it did not spark outright panic. One of the key reasons for this is that many investors believe that the European banking industry is much better prepared for a Greek accident than they were in 2010. The Greek risk factor will probably reduce risk appetites across the globe and result in some flight in safehaven assets such as US treasuries and Swiss financial assets, but not to the same extent as the global financial crisis or start of the Greek sovereign risk crisis bank in 2010 or the emerging market crises in 1997/98.”
Weimar added that emerging market stocks, bonds and currencies have been under pressure.
“The strain on emerging markets will probably persist, if not due to risk aversion triggered by Greece, then due to changes in US monetary policy and perceived earnings differential across the globe.”
Paolo Senatore, chief investment officer for Ashburton Investments, said should Greece exit the eurozone following the referendum, it would not have a great impact on other markets outside the eurozone. “Investors may retreat to their safe havens, which is the developed world, and they might leave the equity and bond market exposed and increase volatility in those markets until there is some resolution.”
Senatore said Greece is not big enough to affect global growth and that the outcome of the referendum will determine how austerity measures will be affected.
“It should not have a big impact on the South African economy.”
However, Ian Cruickshanks, chief economist at the South African Institute of Race Relations, said international investors will probably stick to safe havens, meaning they would transfer funds back to the dollar and out of the emerging markets and the rand arena. “The risk we could see in capital outflows from South Africa which could lead to a considerable rand depreciation and could mean higher interest rates, higher inflation and slower business activity.”