Friday 26 May 2017

Disorderly Greek default is global worst-case scenario

The Greek crisis, coupled with worries over a double-dip recession will hit our export-led recovery hard, writes John Reynolds

AS panic about a possible Greek default gathered pace again on Friday against the backdrop of European political paralysis that is now infecting its banking system, there are increasing risks that we are sliding down the slope of a double-dip recession and that we might end up in a worse situation than we did after the 2008 financial crisis, Robert Brennan, managing partner of investment firm Cedar Capital suggests.

If the recent job losses at TalkTalk, growing fears for jobs at Aviva and this week's stream of negative economic data from the US, Germany and China are anything to go by, there are reasons to be increasingly fearful for our tourism and export sectors -- in particular tourism from our main markets, the UK and US, and more than a third of all our exports which go to those countries, he adds.

Ireland's GDP fell by 7.1 per cent in 2009, but the big fear is that another sustained contraction could be of that level or worse.

If services exports from call centres and similar jobs take a hit on top of our trade in goods such as medical devices and pharmaceuticals, this puts all the current assumptions by the Government and the ECB-IMF-EU troika about our ability to service our debt pile in jeopardy. As next year's budget looms on the horizon, it could result in demands for deeper austerity, hitting Irish households and our domestic economy even harder.

Another growing risk is that the US may increase its efforts to bring multinationals back from Ireland, Brennan says -- one Republican presidential candidates has already spoken about this -- and that other countries may also increase their incentives for multinationals in a bid to create badly needed jobs.

In the more immediate future, Greece has enough money to tide it over until mid-October before it needs an €8bn tranche of funds from the troika and most market watchers believe that if it is going to default, it will do so within the next two or three weeks.

Although its government has pledged "to do anything" to stay in the euro, whatever path it takes will have consequences for Ireland, some of which may be beneficial, while others are potentially horrific.

Irish exports to Greece, which were worth €307m last year according to the Irish Exporters' Association, are down by about 10 per cent this year. Many exporters have already made arrangements as to how they would get paid by their Greek customers in the event of a default. Many have set up adequately funded foreign bank accounts in order to maintain a good credit rating, says IEA chief executive John Whelan.

An orderly default where Greek debt was effectively paid down by other European taxpayers, would lead markets to expect that Ireland would seek a similar arrangement. But it seems unlikely, Conall MacCoille, chief economist at Davy Stockbrokers claims.

"It's possible that Greece will default in a disorderly way but I think we're very close to the ECB stepping in to try and dramatically avert that," says former banker Peter Brown, who is now MD of the Irish Institute of Financial Trading.

The ECB doing so would benefit Ireland in three ways. Interest rates would be cut by one per cent, the euro would weaken over six months, which would be good for our exports and Irish debt could also be restructured or forgiven if Greece also got a similar deal.

"However, a disorderly default would cause the euro to shudder and whether it could hold, I don't know. There would be immense chaos and it would be the worst possible scenario for not just Ireland but the whole global economy," he adds.

"A disorderly default by Greece, including private sector involvement, could lead markets to question Europe's commitment to fund Ireland, which would worsen our chances of re-entering the international bond market.

"Greece defaulting and leaving the euro would bring additional instability by causing an immediate run on the banking system. Further restructuring of Greek sovereign debt within the euro is far more likely," MacCoille says.

A disorderly Greek default would also create immediate volatility in the currency markets, which would hit exporters, Whelan says. Thirty-six per cent of their transactions are in dollars and 12 per cent in sterling.

"I think there's a general belief that the eurozone is stable enough to stand a Greek exit. But if it resulted in a total split-up, the most sensible scenario for Ireland would be to link with sterling, although it's not something that the vast majority of exporters are anticipating. It's the doomsday scenario.

"That said, I've no doubt that the Bank of England has a contingency plan that involves Ireland. But I'm not so sure whether the Irish Central Bank has one," Whelan concludes.

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