Saturday, May 19, 2012

Greece exit a global catastrophe ?

I saw some media headlines about the potential Greece exit causing a global catastrophe, and decided to dig a little deeper into it.

The question I was trying to answer was – is anybody really talking about a global catastrophe if Greece exits from the EU?

Here’s what I found:

Nope – nobody – zilch!

Take a look at what Stephane Deo, chief European economist, UBS AG told CNBC-TV 18 in an interview

Q: “Do you think there is a choice of whether policy makers can choose to keep Greece inside, or do you think if Greece were to leave it could be a catastrophe and could lead to a sort of a Lehman moment in financial markets? Do you think it has that kind of potential, or do you think there is still a possibility that Greece may go out, you could have major write- downs, but it remains a possibility?

A: “It is a possibility. We again believe that it would be very difficult to manage the consequences that, if there is really an impasse between the TROIKA and the Greek government, at some point Greece might choose to leave the euro. I will combat with the argument that it is very bad idea that the Greeks are doing something that is not rational.

But if its politicians decide to do it, they will do it. So it is not impossible, but the fact that it is possible does not mean that it would not be a catastrophe. I think it would be really bad for the Greek economy and also very bad for the European economy.”

He does imply that there is a possibility that a Greece exit could cause a Lehman moment in financial markets and does not deny a possibility of catastrophe. However I don’t see him talking directly about the possibility of a global catastrophe. What he is upfront about is that an exit would be bad for the Greek economy and also very bad for the European economy. I agree with that assessment. There is no denying that an exit by Greece would be really bad for Greece and the European economy.

And What are Greek and European Leaders Saying?

Not even the Greeks themselves are talking about a global catastrophe. Some Greek politicians are talking about a catastrophe, but they mean a catastrophe for Greece and not a global catastrophe.

Not even the now ‘famous’ report from the Institute of International Finance (IIF), went on to the extent of implying that a Greece exit could cause a global slowdown. Its global slowdown theory is itself far-fetched, and is widely believed to be biased, but even the IIF did not talk about a global catastrophe.

My View

So basically, nobody, not even the biased parties, are talking about a global catastrophe. Of course there are lots of folks who are painting a very gloomy picture, and some of this negativity is definitely justified.

So, how much of this gloom is justified and what is likely to be impact of a Greece exit – can it really take down the world?

My own analysis shows that Greece can’t take down the world. The key points are summarized below:-

- The country of Greece is comprised of less than 0.5% of Global GDP! It’s not just small, but it is too minuscule to cause any widespread global impact. No doubt a Greece exit would cause panic and fear, and equity markets would crash, but the real impact on global growth would be near zero.

- If the 50% 'forgiveness' of Greece’s loan in March 2012 didn't cause any real blip on the global economy, how on earth will the default of the remaining 50% cause a global slowdown?

So what about those who are talking about CDO losses and the contagion effect and painting a gloomy picture?

Here’s my take:

Several banks and institutions will certainly go down (especially those who were greedy enough to write CDOs on Greece’s debt), and many jobs will be lost. I would think that in such a scenario, countless big-wigs in the banking and finance industry would no doubt be joining the hall of shame along with Alan Greenspan, Dick Fuld and many others. Some of these people could likely get prosecuted and possibly even join Maddoff’s ranks as well. The underlying issue is this – are business and political leaders really afraid of something else?

In summary, a Greece exit would be really bad for Greece, bad for Europe, just a tiny bit bad for US, but have near zero impact on global growth. As for global catastrophe, except in some media headlines, I couldn't find a soul who believes that Greece’s exit would cause a global catastrophe.