Greek default can hurt new markets

A Greek default could hurt emerging markets with global investors like to react sharply.

Greek default can hurt new markets

World Bulletin / News Desk

Should Greece default, emerging market economies are expected to face severe headwinds, experts told Anadolu Agency on Thursday.

The Greek government and the Eurogroup meet on Thursday in what is expected to be a last chance to avoid Athens’ default on its loan obligations to creditors.

Should Greece default, global investors will react sharply to the high risks such a move involves, experts said.

"Messy situations such as Greece are generally bad for emerging markets," warned John-Paul Smith, emerging markets analyst at global equity consultant Ecstrat in London.

"Emerging market equities would obviously fall"  he warned.

"There is likely to be an immediate sell-off from emerging markets," agreed Christopher Dembick, an economist with Saxo Bank in Paris.

"Nervous investors would move their money out of emerging markets to safer dollar assets. This will put pressure on banks in developing economies, as the expected nationalization of Greek banks shakes up global banking," Dembick claimed.

The impact of currency will be abrupt, Dembick adds: "EM currencies will fall sharply against the dollar."

"The euro, on the other hand, will fall sharply in the short term, at least. The longer-term effects of such a radical change on the euro are uncertain."

In the short-term, Dembick expects that the euro would drop to about 1.05 against the dollar.

However, Istanbul-based Ziraat Securities economist Bora Tamer Yilmaz, while agreeing that a sell-off is most likely, does not think the effect will be prolonged.

"It seems like the Greek episode in 2015 is a little different than the episode back in 2012. Then risk aversion increased and we have witnessed outflows due to contagion.

“A default in Greece would have jumped to European banks, posing a domino effect. Today, many European banks have cut their exposure to Greece. Therefore an overall market crash seems less probable today than it was back in 2012," Yilmaz commented.

Nonetheless, Yilmaz said, as a knee-jerk reaction definitely “we could see a sell-off across the board, which some investors could regard as a buying opportunity”.

Analysts do agree that the danger to the banking system is considerable. While exposure to Greece and Greek banks has been reduced, banks in developing countries will suffer from the immediate outflow of funds, putting pressure on their foreign-currency reserves, Dembick said.

There is also danger of repercussions for the regio.

"The events could have huge repercussions for eastern Europe, especially the Balkans which share close trade and banking risks with Greece, although the more-liquid Polish and Hungarian markets may bear the brunt of the selling,” said Simon Quijano-Evans, Commerzbank head of EM research said in a note on Tuesday.

Everything in emerging markets is likely to suffer, Quijano-Evans also claimed.

Güncelleme Tarihi: 18 Haziran 2015, 13:56