Euro zone 'well placed to cope with Greek crisis'

A Greek flag flying past a statue depicting European unity outside the European Parliament.
A Greek flag flying past a statue depicting European unity outside the European Parliament.PHOTO: REUTERS

The euro zone seems well placed to cope with any major disruption arising from the shock Greek referendum outcome, economists say.

But the coming week will be a test of the scale of any contagion effects, they add. Mr Richard Jerram, chief economist of the Bank of Singapore, rejected the likelihood of another shock similar to the scale of Lehman Brothers, whose 2008 collapse helped set off the global financial crisis.

He said unlike Lehman, whose debt levels involved deeply complex financial instruments, Greece will mainly be defaulting on sovereign debt to multilateral bodies.

"Potentially, this is very painful for the Greek economy, but it should not be too disruptive for the global financial system," he said.

Asian exposure to Greece is "almost zero", and the private sector exposure to Greece today is "very very small", DBS Group Holdings chief executive Piyush Gupta noted at a client event yesterday.

A European Central Bank (ECB) decision on emergency funding for Greek banks, to determine if banks can reopen today, is the crucial issue, economists say. A decision to freeze this funding will put the Greek banking system in jeopardy.

Banks have been shut and capital controls have been in place since Monday last week, after the ECB declined to give Greece more emergency funding. Withdrawals at cash machines have been limited to €60 (S$90) a day. Some observers say the banks may not reopen today.

"I don't see how the banks can open (today)," Associate Professor Christos Sakellariou of the Nanyang Technological University economics division said.

"The default expectation has not changed, hence the €60 limit will stay. Depending on the signals the ECB get from their country members, they may restrict liquidity further, leading to more crippling controls," Dr Sakellariou told The Straits Times.

DBS economists Radhika Rao and Philip Wee said the ECB is likely to allow banks to access existing funds contingent on another round of negotiations, but reject calls for a lift in the ceiling, raising the likelihood that capital controls might be imposed to prevent a bank-run.

Mr Gupta added: "The ECB will... pour in more easy money to make sure that there is no negative tail risk consequence (from) Greece."

"The next fencepost for the ECB will be the €3.5 billion repayments due July 20," DBS said, adding that if Athens misses that deadline, the ECB will have the right to freeze the emergency funding and also put Greece in official default.

The lack of a bailout deal may also increase the risk that Greece would exit the euro zone.

Mr Jerram added: "The Greek government is probably obliged to issue IOUs to pay its domestic bills, while defaulting on external debt. These IOUs can act as a parallel currency, presumably trading at a big discount to the euro. This is not a long-term solution, so unless a new funding deal can be struck, in the end, Greece is likely to issue new currency and exit the euro zone."

A diplomatic source said the mood among the "no" voters was jubilant even as Greece awaits decisions on the extension of the emergency liquidity assistance. "(Greek Prime Minister Alexis Tsipras) had a phone-in with the German Chancellor. Agreed for him to present a new Greek proposal at (today's) summit," he said.

Dr Sakellariou said negotiations will restart, but whether there is an agreement will depend on a breakthrough on the issue of the restructuring of Greece's debt. "If restructuring is part of the deal, Greece will accept more of the economic measures demanded of her."

•Additional reporting by Jeremy Koh

A version of this article appeared in the print edition of The Straits Times on July 07, 2015, with the headline 'Euro zone 'well placed to cope with Greek crisis''. Print Edition | Subscribe