Liam Halligan in London -
As Greek euro membership swings in the wind, fraught investors have been trying to predict the ultimate consequences of this crisis for other “peripheral” members of the single currency.
With Athens owing the International Monetary Fund (IMF) and the European Central Bank (ECB) a combined €5.5bn before the end of July, and with sovereign debts topping an eye-watering 180% of GDP, some easing of creditor demands, and broader debt relief, will simply have to happen if Greece is to remain in the Eurozone.
Such concessions would spark serious public resentment and some very tough questions from Portugal, Spain and Ireland, where tough bailout conditions and debt repayment schedules have largely been met over the last two years – to say nothing of Germany, the region’s paymaster-in-chief. Why should the Greeks get a sweetheart deal, denting the credibility of Brussels, the ECB and IMF in future euro-related debt negotiations – of which there are likely to be many?
Unless there are at least some concessions, though, Greece will crash out of the single currency. Having contracted 0.4% during the final quarter of last year, and another 0.2% over the first three months of 2015, the beleaguered Greek economy, where GDP remains 25% lower than in 2008, is back in recession, ending any immediate hope of “growth-led” budget improvements. In recent months, as the crisis has intensified, bank deposits have diminished and cash transactions increased, squeezing the tax-take further and making a dire fiscal position even worse.
That’s the dilemma at the heart of this Greek tragedy – a dilemma that won’t go away even if a deal can be fudged that keeps Athens in the euro for now. Evermore easing of the policy conditions and evermore debt relief will incense the electorates of other weak Eurozone members – making it increasingly difficult to stop them “doing a Greece” and attempting wilfully to break the fiscal rules, then getting extra money anyway, as the IMF, Germany and Brussels move to fend off another “Lehman moment”.
Imposing the rules in their entirety, though, would definitely spark a Grexit – which could come soon if Athens welches on the €3.5bn it owes the ECB by July 20, or the additional €3.3bn it must pay the Eurozone’s central bank by the end of August. An ECB default, far more serious than reneging on the IMF, would see the credit lines cut that are currently supporting Greece’s debt-soaked banking sector. As the ATMs ran dry, savings evaporated, and panic and rioting ensued, Athens would be forced to recapitalize local banks using some kind of alternative currency.
In the wake of such a Grexit, how quickly would the Greek economy, after the initial shock, benefit from a weaker currency and recover? How many other Eurozone members would then threaten to follow suit? Where would such traumatic events – previously dismissed by the eurocrats not just as “unthinkable” but “impossible” – leave the European Commission and the broader “European Project”?
Amidst so many unknowns, one thing seems clear. Whatever deal is struck this summer, if there is one, it will only be a sticking plaster. Greece faces many extremely heavy debt payments in the months and years to come. And while Germany has indicated further debt relief may be possible – the concession that resulted in Athens finally offering policy concessions on June 23 – the Greek sovereign debt is so enormous that only a very significant write-off would tackle on-going Grexit speculation. But that very write-off, given the related moral hazard and potential political fall-out, could threaten the broader existence of the euro.
The enormity of these economic questions, the huge uncertainties and the seismic geopolitical implications of the various outcome scenarios make it forgivable, perhaps, that there’s been little mainstream Western analysis of what a Greek default would mean for non-euro members in the region. While Spanish, Portuguese and Italian government borrowing costs have spiked as tensions between Athens and its creditors have cranked-up, the geographically-closer economies of Central and Eastern Europe are also likely to suffer.
A new report from UBS argues that a messy Grexit could wipe up to a fifth off the dollar value of CEE currencies, while sparking spillover effects throughout the broader asset class. “Should Grexit happen dramatically and quickly, global investors would likely reduce exposure to risky assets… and, under such a scenario, emerging market (EM) currencies would depreciate against the US dollar,” the report says.
“Currencies in central and eastern Europe would be affected more than the EM average as they have the largest direct exposure to the eurozone… and currencies in CEE would underperform for longer, as they’d be affected both by setbacks in risk sentiment, but also economic contagion, given their close trade and financial links to the eurozone.” The strongest impact, according to UBS, would be felt on the Hungarian forint, where a 5-10% depreciation against the euro is expected, implying a downside of 15-20% against the dollar.
Bear in the woods
Another aspect of this Greek crisis often overlooked in Western circles, or talked about only in hushed tones, is the implicit involvement of Russia. Ever since Syriza was elected in January, the Greek government has made overtures towards Moscow. Under the radical left party, Athens has threatened to block the renewal of EU sanctions against Russia, while suggesting it might seek Russian bailout finance as a bargaining chip against the West.
Russia helped bailout Cyprus in 2013, after all, and the links between Athens and Moscow run deep. Some $10bn of bi-lateral commerce, with Greece importing 60-70% of its energy needs from its giant eastern neighbour, makes Russia Greece’s largest single-country trading partner. The cultural crossover is also considerable, not least given the reach of the Orthodox Church.
There’s also another dimension to Greek-Russian relations. “Just because Greece is debt-ridden, doesn’t mean it’s bound hand and foot and has no independent foreign policy,” observed Vladimir Putin during the early summer. “Greece could earn hundreds of millions of euros through gas transit.”
Once the EU imposed sanctions on Russia in March 2014, Moscow responded by blocking agricultural exports to Russia. This has ruined a fair few West European farmers given that, pre-sanctions, a third of EU fruit and vegetable exports were sold in Russia, and a quarter of exported beef.
Less widely noticed was that Russia also cancelled “South Stream” – a Black Sea pipeline that was meant to pump Russian gas to Bulgaria, an EU member since 2007. That pipeline has now been transformed into “Turkish Stream”, still going across the Black Sea but making land, instead, in Turkey (which, of course, remains outside the EU). This sanctions-related diversion could cause the EU headaches, given that Turkey is far more powerful and less controllable than Bulgaria, and Western Europe relies on Russia for around 30% of its oil and gas.
Turkish Stream, the building of which is well underway and due to completed in December 2016, also brings Athens into play. Once it’s completed, Turkish Stream gas could then be brought to Western Europe by extending the pipeline via Greece, generating not only transit fees for Athens, but also the prospect of Russian-subsidized gas.
Attending a Russian Energy Forum in London during early June, organized by Eurasian Dynamics, I heard an interesting speech from Lord (Peter) Mandelson. The former UK trade secretary and EU trade commissioner says the time for an EU Energy Union “has clearly come”, given the “central role of energy in the relationship between Western Europe and Russia, and with EU-Russia relations at the lowest ebb that I can remember”.
The EU Energy Union is a proposal for member states to act together to secure their collective energy supply interests –not least, in Mandelson’s words, by “putting up a united front against Russia”.
While acknowledging the Energy Union “is in its infancy” and “not a vision held by all member states”, Mandelson stressed that the “quasi-judicial power” of the Brussels directorate pushing for it meant “it wouldn’t be dissuaded”, and that we can expect “significant developments soon”.
That may or may not be the case. But since Mandelson spoke, Moscow and Athens have unveiled a preliminary agreement to extend Turkish Steam through Greece at the St Petersburg International Economic Forum – a development that would encourage Athens to operate outside of any purported energy union, just as Nord Stream, which since 2010 has pumped Russia gas directly to Germany, encourages the same response from Berlin.
As negotiations over a renewed Greek bailout and broader debt-relief continue, there are big implications for other countries, not least those in CEE. Watch, also, for the role Russia will play, either as a Greek counter-ploy, a provider of future gas-transit revenues and even, a contributor of bailout cash, not least if such cash is linked to a pipeline deal with Athens.
Follow Liam on Twitter @liamhalligan
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more