The exit of Greece from the Euro Zone, nicknamed as GREXIT, is the currently trending topic of the global economy. Grexit is looking almost inevitable at this point of time as far as the talks between the Greece Ministers and its creditors are considered. Amidst all the events, we will take a look at how the world economy might be affected and how Indian markets might react.
Let us start with a small recap on how this situation of a default by a country actually arose in Greece. Has it happened all of a sudden? Or has it been an effect of a long-term sustained stressed situation? So here is whats been happening in Greece in brief right from 2008, the year popularly known as the year of Sub Prime Crisis. Although it has no direct correlation with the current situation in Greece.
Just when the world was recovering from the global slowdown of 2008, with the fear of default and in the hope of getting assistance, Greece announced that it was understating its deficit burden from quiet a long time. The news came as a complete surprise to the markets and while analyzing this situation the world started questioning the ability to payback its debt obligations. Greece had a debt to GDP ratio of around 146% by 2010. Due to which the Greece bonds were declared as Junk bonds( precisely non investment grade bonds), which prohibited them from accessing the bond markets.
In this adverse situation, the International Monetary Fund (IMF), the European Central Bank (ECB) and European commission(EC) came to rescue with a proposal for Greece to initiate a revival. IMF, ECB and EC, together popularly known as the Troika, extended a loan of 110 Billion Euros in its first lot, and another pack of 130 Billion Euros. Although this assistance came with certain conditions like cutting down Govt debt, structural reforms and privatization of Govt Assets. These severe austerity measures were not taken well by the public. However, this continued for a year and then finally a premature election was called for in Dec 2014 since the public wanted a new govt to handle the situation. The new Govt in power refused to accept the measures suggested by the Troika for its revival against a huge sum of 240 Billion Euros. From that time onward, there has been immense political uncertainty, which is indicating that the Euro Zone might probably let go off Greece.
Currently Greece is left with two bad choices to make and its been left to them to choose whichever might lead to lesser repercussions. Following image might just give a brief idea of the condition:
In case if Grexit happens, then the stock markets might see turmoil for at-least a medium term period since many companies in various countries have immense dependency of their revenues from the Euro Zone. Before we look at what would happen to Indian Markets, let take a look at what would happen in general on the event of a default. Grexit would mean distress in the euro zone, depreciating euro against the major currencies. Dollar would strengthen immensely over this event, thus putting further downward pressure over rupee. Apart from currency markets aspect, it might even lead to FIIs outflow since the emerging markets as a whole would become risky and the investors might want to invest in safer assets such as US Treasuries, especially in the short-term. Greece on the other hand might be locked out of the international markets. The crisis doesn’t end there, Greece will have to adopt its old currency, drachma, which will lead to its devaluation on default but the debt will still have to be repaid in terms of Euros, leading to further distress.
Indian Stock Markets on the other hand, might become the favorite destination to invest in the long-term, looking at the simultaneity of Euro Zone crisis, the US showing slow recovery, China showing slowdown, Shanghai Index correcting almost 20% being over valued from the past year and IPOs woes, and all time high forex reserves with RBI to control currency movements. Anyway the markets would not be affected to the extent of correction of 2008 phase since there are not many un-hedged exposures from the corporates. The only issues might be a few companies being exposed to the weak Euro as a part of their revenue generation and the new 30 IPOs lined up to enter the markets. However, in this decisive time it will be interesting to see if Greece handles the situation wisely or will choose to default.
Next up might be something on markets, in case Greece defaults on its 1.5 Billion euro payment to IMF.
Thank you. 🙂