James Bevan: What might happen if Greece left the euro?
0If Greece is forced out of the single currency there would clearly be major political and economic implications for the Euroland itself, and we suspect there would initially be turmoil in global financial markets too. But the economic impact on the rest of the world may well be small.
These are important issues to think about because whatever the outcome of this week’s Eurogroup meetings, we think there is a significant risk of “Grexit” – where Greece quits the euro.
Back in 2010 we argued that, although Greece accounted for only 0.3% of world GDP, a default or a “Grexit” posed a real threat to the world economy. Five years later, while still significant, the global fallout may now be smaller. For a start, another Greek sovereign default, which would surely accompany an exit, would have little direct impact on private sector balance sheets because the vast bulk of Greece’s public debt is now owed to official creditors. European banks have also slashed their exposure to Greece. And finally, the Euroland has put in place back-stops which should help to limit the contagion, including the launch of “full-blown” quantitative easing.
That said, Greece’s exit would be seen as a major policy failure for the region and, as such, would once more place a question mark over the longer-term membership of the currency union. This uncertainty could be a significant drag on business sentiment. Moreover, support for anti-austerity parties such as Podemos in Spain and the Front National in France could increase further, particularly if, over time, the Greek economy thrived outside Euroland – as we suspect it would.
Beyond Euroland, the fallout from a Greek exit would be felt primarily through financial markets. The shock of “Grexit” finally taking place would be likely to dampen global risk appetite, leading to a sell-off in global equities and some emerging market assets. On the other hand, there would be an increase in demand for safe havens, including non-euro government bonds and gold. Other European currencies, such as the British pound, Swiss franc and Danish krone, which have already been under upward pressure in recent months, would be likely to experience substantial capital inflows. This could in turn prompt some central banks to ease policy further or to delay rate hikes.
Further afield, the direct impact of “Grexit” on the US economy would be relatively small. Greece accounts for just 0.05% of US exports and the five southern Euroland countries together account for only 1.8%. Exposure of US banks to Greece is also very low. The bigger effects would be felt through currency and bond markets. A “Grexit” would surely boost safe-haven demand for the dollar, weighing on US growth. But this demand would also lower the yields on US Treasuries, while the Fed might respond to the increased global uncertainty by keeping interest rates lower for longer. The net effect of these developments might therefore be small, or even marginally positive.
The upshot is that the main effect of Greek exit on the world economy may be to reinforce the gulf in performance between the Euroland and the US, rather than trigger another global recession.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
