Asia will take a hit on Greece's disorderly exit
As the possibility of a Greek exit from the euro zone is heightened ahead of the June 17 national elections, a disorderly exit is expected to take a toll on Asian manufacturers as it would dampen export demand and reduce trade financing, said analysts at
The impact, however, depends on available fiscal and monetary ammunitions Asian governments can deploy, said Fred Gibson and Glenn Levine, analysts of Moody’s Analytics – a research arm of Moody’s Investors Service.
Their analysis shows that the impact would be amplified if the financial fallout reverberated globally. Similarly, if the financial fallout persisted, the downturn would be deeper and the recovery delayed.
They noted that should the exit happen, the chances are that it will be disorderly and severe financial ructions would spread across the globe.
Asian economies could feel the pinch in three main channels – financial and credit markets, export demand, and foreign investment.
In the first channel, global equity markets and credit conditions would be tightened. Notably, the consequences of a tight credit market were painfully felt during 2008-2009 after the Hamburger crisis.
The second channel is via demand; a disorderly Greek exit would lower economic activity and import demand in Europe and elsewhere.
In the “Grexit” scenario, tighter credit conditions and the downturn in equity markets would crimp business confidence, weighing on business investment, employment, and household spending abroad.
The final channel is through direct and portfolio foreign investment, as investors may pull back from riskier Asian assets and foreign firms may pull back on expansion plans.
“Asian financial markets would take a hit as well, with some knock-on effects for domestic demand, but Asian manufacturers are still largely export-driven, so this is the main demand channel that we are interested in,” it said.
The analysis warns that Asian manufacturers may be affected if the contagion spreads to the US financial system.
European lenders account for one-quarter to one-fifth of US commercial lending; so far US banks are filling the gap, but that could change.
It came up with two scenarios.
If the financial market contagion is limited to Europe, it sees a mild downturn in production, bottoming out at 5 per cent year-on-year growth in March 2013.
In the second scenario when the contagion hits the US financial market, Asian production will contract by 8.5 per cent year on year in March 2013.
The impacts on Asian production under the two scenarios are a 4-percentage-point drop and a 17-percentage-point drop below the baseline, respectively.
“When the US is dragged into the financial turmoil, the impact quadruples instead of doubling, as might be expected given that the euro zone and US economies are of similar size,” it noted.
It explained that this may result from a possibility that Asia has different linkages with Europe and the US. Europe is responsible for a lot of Asia’s export financing, as well as some final demand, whereas the US provides only a modest amount of Asian trade financing but a lot of final demand.
“The results suggest that the export demand channel is three times as important for Asian manufacturers as the trade financing channel.” The analysis assumes that financial market stress from a |disorderly Greek exit persists for |12 months before conditions stabilise.
However, Moody’s Analytics found that during the 2008-2009 downturn, the financial market stress lasted for 14 months and it is convinced that the effects of a Greek exit from the euro zone may persist far longer.
However, if the tensions last for two years, it sees that the impacts would be drawn out no matter if the “Greexit” tension is limited in Europe or spreads to the US.
“The downturn in all of our scenarios isn’t as severe as the 2008-2009 global recession. This seems reasonable, as Asian firms and policy-makers are better positioned heading into any new crisis. The trade-financing channel appears |less important. Following the 2008-2009 credit squeeze, Asian central banks increased swap lines, while Asian companies sought alternative sources of finance and supply arrangements to better cope with any future credit problems. This effect, at least, should be mitigated,” it said.
However, it noted that the Asian recovery from a global credit event also would not be as swift as it was after 2008-2009, as Asian governments face fiscal and monetary constraints.
China, for example, is unlikely to match the large-scale fiscal and monetary response seen in 2008-2009.
The muted policy response leaves Asian manufacturers with a longer road back to full production.
