What Does the Greek Crisis Mean for Global Business?

As the debt crisis in Greece continues to develop, markets and businesses are preparing for the ripple effects if the country can’t reach agreement with its creditors and decides to leave the Eurozone. Would this scenario lead to further deterioration of the euro, and what would that mean for Europe’s trading partners? Could a spreading crisis affect global commodity prices, and how would that impact an exporting country? Global Network Perspectives spoke with experts at several schools in the Global Network for Advanced Management to get the view from Brazil, Germany, Chile, and Hong Kong.

Brazil

Marcos Fernandes G. da Silva, Professor and Researcher, FGV Escola de Administração de Empresas de São Paulo

Firstly, Greek economic crisis is literally the chronicle of a death foretold. This crisis is already priced by the markets. Economic agents know today what they did not know in the 1990s: how to differentiate Brazil from countries on other continents with different economic situations.

In the short term, therefore, the Greek crisis would not impact Brazil. In the medium term we do not know how the weakest European economies (from the macroeconomic point of view) will react to the crisis. This could be a problem to Brazil, but improbable.

However, there is evidence that these economies are relatively adjusted. In Brazil, the problems are endogenous, resulting from an expansionist fiscal policy aligned with the electoral political cycle. In Brazil, the current account deficit in 12 months is around 4.39% of GDP; for 2017 the Central Bank forecast is 4.17% of GDP against 4.47% of GDP in 2014. This is not a comfortable situation, but reversible.

In fact, the signs of a costly macroeconomic adjustment initiated in 2015 are already apparent in a fall in domestic absorption (consumption plus investment plus government spending), exchange rate adjustment (the problem here is very high domestic interest, attracting speculative capital), and an adjustment in the current account deficit.

Ironically, the biggest problem for Brazil is not Greece, but the United States' possible recovery. If the Federal Reserve increases interest rates, there will be capital flight. But as the signs of the U.S. economy are ambiguous, at least for a while we have some relief.

​Germany

Sascha Steffen, Associate Professor of Finance and Karl-Heinz Kipp Chair in Research, ESMT

The Greek financial crisis matters in Germany for various reasons. First, a lot of taxpayer money is at stake. Billions of Euros of bailout funds have been provided by the ECB (European Central Bank). With the increase in emergency liquidity assistance (ELA), potential losses of taxpayers increase every day. Germany (and specifically its leaders, the German chancellor Angela Merkel and finance minister Wolfgang Schäuble) is at the center of attention in how Europe deals with the crisis and will be associated with the success or failure (whatever this means) of crisis management. Merkel and Schäuble will receive blame for every possible outcome (there is probably no “winning”).

Third, there is a clear political will: keep Greece in the euro. This is understandable given the history of the creation of the euro as well as recent anti-European voices in France, Spain, the UK, and other countries. Importantly, Greece is only one of several crises that the EU is facing, in addition to the war in Ukraine and a military build-up of both Russia and the NATO.

There are also geopolitical reasons to keep Greece close. However, German taxpayers are likely more hesitant to support a policy that does “whatever it takes” to keep Greece in the euro area. Since Greece joined, pension, product prices, and wages have increased there to an extent that their levels exceed those in Germany (particularly relative to productivity). Thus, Merkel has to walk a fine line between a maybe politically motivated solution and an economically sound solution (which the German electorate might also support).

​Chile

Rodrigo Cerda Norambuena, Deputy Director of the Latin American Center for Economic and Social Policy, Pontificia Universidad Católica de Chile

The direct effect of the Greek economic crisis on the Chilean economy might not be large. In fact, Chilean exports to Greece represent just 0.2% of total Chilean exports while imports from Greece are just 0.03% of total Chilean imports.

However, there are indirect effects that might be more intense. In fact, we might observe a larger weakness in the euro, which would probably be transmitted to emerging market exchange rates, such as the Chilean peso. It would not be surprising to see a depreciation of the Chilean peso which might mildly accelerate inflation.

A more stringent scenario for the Chilean economy is a scenario where the Greek crisis is transmitted to the rest of the Eurozone: the Eurozone represents almost 25% of Chilean exports. That contagion scenario is far more complicated as (1) the growth rate of the Eurozone would be decelerated, and Chilean exports would be required to be sent to other geographic locations, (2) the Euro would weaken further and (3) commodity prices might continue to deteriorate, which is especially important for the Chilean economy in the case of copper—the main Chilean export, representing almost 50% of total exports.

​China and Hong Kong

Samuel Liang, Associate Director of the Value Partners Center for Investing, HKUST

The impacts of Greek crisis on the international financial market, particularly in China and Hong Kong, will be short-lived. The Greek crisis has been dragged on for some six years, during which investors and finance institutions around the world have been keeping an “arm’s distance” with Greece, reducing loans to the nation and thus minimizing the default risk on debt. Meanwhile, investors have fully expected and prepared that Greece would withdraw from the Eurozone.

After all, today’s global investment market is more likely to be driven by a rational response, rather than market sentiment, as reflected in the recent bond market in Europe. For instance, as of June 26, Italy, Spain, and Portugal’s government 10-year bond yields were 2-3% amid the Greek crisis—a level much lower than 7% or higher at a time when Europe was first or previously hit by the same problem. It reveals that the impact of Greek crisis has been diluted today.

Although Greek crisis would have a limited impact on the global finance market and the European economy, it would see damaging disruptions to Greece’s financial system and bring far-reaching political implications to Europe, such as triggering a new wave of protests against tight fiscal policy among EU member nations.