By Abdul Rawuf
Besides the financial sector, the Greek crisis could affect industries, such as shipping, automotive and textile
The Greek economy accounts for only two percent of the EU’s GDP, but any news on the country is causing a ripple effect in the business world. While most are knee-jerk reactions, the possible impact of paying a Euro 6 billion loan could potentially hurt more than it is anticipated.
With its debts too huge and unsustainable, Greece has two options: agree to the terms of and continue to be part of the EU, or go with the referendum and exit the Eurozone.
Vinod Cartic, Senior Consultant, Business & Financial Services, Frost & Sullivan says: “A Euro exit could be costly and drastically reduce the value of Greece’s resident’s savings, putting further pressure on the earning class. Given that the debt will be in Euros, Drachma will face significant depreciation tailwinds, potentially creating hyper-inflation leading to social chaos. However, after this painful transition, Greece might see marginal improvements in export and tourism due to a depreciated currency.”
Alternatively, and even though 60 percent of the Greeks voted for “no bailouts” in the referendum last Sunday, Greece might still want to remain in the Eurozone, but with a substantially lower debt burden, a position that is both economically judicious and protected by treaty. Relief and real reform packages to restore growth must therefore be balanced and benefit both debtor and creditor. Given the steep decline in GDP by 25 percent from 2010 and nearly 60 percent unemployment level, Greece might use its savings to pay pensioners, provide food relief, improve infrastructure, and pump in direct liquidity toward the banking system.
Whichever road Greece choses to take, austerity measures will expose international markets and industries to possible losses. Businesses will rethink supply chains, inventory, and production, while stores will not order merchandise unless they think they can sell it right away.
“The billion dollar question is, which industries are going to suffer in case of a default,” says Visionary Innovation Research Group Team Leader, Archana Vidyasekar of Frost & Sullivan. “For the finance sector, this crisis is a double-edged sword, as not only its portfolio in Greece will be affected, but also its relative exposure to other countries that may be impacted by either a Greek default or a further extension of credit to this debt burdened country.”
But the crisis could also affect other industries, such as shipping, automotive or textiles. “HSBC’s total net asset value of $7.3 billion is mainly comprised of loans to banks and the shipping industry,” says Vidyasekar.” Similarly, the Royal Bank of Scotland Group Plc has $376 million of Greek exposure, also primarily to banks and shipping. A default could mean the lenders cut their assets and portfolio in Greece leaving the shipping industry vulnerable.”
The automotive industry could be affected by way of impact on loans and exchange rates and the ability of companies to refinance their operations. Auto makers in Europe are already struggling to raise a fresh round of financing due to the uncertainty looming in Europe.
Finally, if the Euro loses value in face of the Dollar, Greek textile exports are expected to decline with growing competition from China and India. Key industries, such as metals and mining are also seeing serious dips in value as investor confidence declines and money is being pushed out of riskier assets such as metals into safer ones.
This crisis appears to have a definite impact on Europe and the Euro which will have huge ramifications to Europe-based industries, particularly those with production and manufacturing assets in this region. As European exports lose its value, there could be a shift in FDI and private equity to other nations in manufacturing and key industries. The ability of Germany and other European big guns to stabilize the Euro will be the biggest task up ahead in case of a Grexit. Globally the impact will be minimal as growth in emerging markets and new manufacturing zones in India and Africa take poise. All of the above, of course, depends on which scenario Greece will opt for, a Grexit or not.