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Implications Of A Greece Exit by Sui Chuan, Value Edge

With the Greece negotiations hogging global economic headlines in recent days, I cannot help but ponder the implications of a Greece exit (“Grexit”) from the Eurozone. Many would say that it will reduce investors’ confidence in the Eurozone, but I think such an answer is nebulous at best. As value investors, our investment decisions are based on pure fundamentals. Market fearfulness is an opportunity only if we are aware of the fundamentals. I have identified the following 3 implications of a Grexit.

Default losses

In a Grexit, Greece is unlikely to be able to repay its bailout loans and creditors would have to incur a loss. Depending on the magnitude of write-offs, this might have severe implications on the financial health of creditor nations. Just how much does Greece owe? It has been reported that:

The eurozone bailout fund is owed 142 billion euros ($162 billion), individual countries are owed 53 billion euros, and the European Central Bank holds 20 billion euros in Greek government bonds. Same goes, most likely, for another 50 billion euros owed by the Greek central bank to the ECB and the other national central banks though the eurozone payments system.

We gather the total amount to be 265 billion euros which corresponds to 1.96% of total 2013 Eurozone GDP – hardly a doomsday figure. Admittedly, the severity also depends on the level of exposure of a particular country its contribution to the loan amount. For example, if Finland with a GDP of 201 billion euros in 2013 was the sole creditor for Greece, it is likely that a Greece default will have severe financial implications for Finland as well, triggering knock on effects to the global economy. While I am unable to obtain the breakdown of the bailout contribution by country, I nevertheless believe such an event to be unlikely given that the entire bailout corresponds to 5.4% of both Germany’s and France’s GDP (2 largest creditors of Greece) combined.

Reduced utility of the Euro

Imagine if Germany and France were the ones that exited the Eurozone – someone travelling to these countries would no longer need to exchange their domestic currency for the Euro. Consequently, there would be less demand for the Euro currency because it is no longer as widely use and its value would depreciate. There could be a similar result upon a Greece exit. However, given that contributes 2% of the entire Eurozone’s GDP, I believe this is an unlikely outcome as well.

Trade disruption

The Euro will no longer be Greece’s currency if it exits the Eurozone. During the transition to the new Greek currency, existing trade contracts denominated in Euro will be un-executable. Even after the transition is completed, the new currency is likely to have a value significantly lower than the Euro. This depreciation means that Greece importers would face higher import costs. In an extreme yet plausible scenario, trade creditors and suppliers to Greek companies might incur write-offs or defaults upon implementation of the new Greek currency. To evaluate this prospect, we gather trade data from Atlas MIT and World Bank. Greece’s top 20 trading partners in terms of import and export is listed below, ranked according to the proportion of trade to each country’s GDP.

Greece’s Top Export Destinations

Greece Exit

Greece’s Top Import Origins

Greece Exit

Countries highlighted in orange are those that appear in both list of importers and exporters. These are the ones which will experience a more significant impact from a Grexit. If I were the government of Marshall Islands, I would be sweating buckets over the current bailout negotiations. But for everyone else in the world, Marshall Islands is hardly a significant player in the global economy with a GDP of 184 million. On the other hand, fresh of a bailout in 2013, a Grexit and its consequent disruption to trade might tip Cyprus back into a situation where it requires further stimulus, triggering the whole domino effect.

Final words

Granted, I’m no economist and the latest data available is from 2012, I nevertheless hope that this article serves as a basis for further research. In my opinion, the economic situation of Cyprus warrants deeper analysis before we can safely say that a Grexit will have minimal impact on the Eurozone and the world. It is easy to dismiss a Grexit on a macro level because it is a mere 2% of Eurozone GDP; its first order impact indeed seems nominal. But as in most crises, it is the contagion effect which brings about the destruction and it is vital we examine the individual links in the chain that is the global economy.

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