Economic Highlights

New Delhi, 3 July 2015

Lessons From Greek Crisis

DON’T COPY WEST, LOOK AWAY!

By Shivaji Sarkar

India has never bothered about Greece since Alexander the Great’s invasion in 326BC. But, today with the Greek debt crisis evolving into not only a volatile economic crisis but also a global political tangle all eyes are on it.

True, most believe that the tiny nation does not have much importance for a growing economy, but the Reserve Bank has taken note of the development. It feels the Greek debt crisis could lead to uncertainties coupled with the US Federal Reserve rate increases, might trigger global financial volatility.

Notably, the RBI is concerned about the risks to the banking sector particularly its weakness in asset quality, especially the large non-performing assets of public sector banks (PSB) and private banks. The PSBs have over Rs 3 lakh crore as NPA (non-performing assets), read losses.

Besides, despite improvements in foreign portfolio flows, the Central bank is cautious about monetary policy changes as it fears it might lead to a slowdown or reversal of such flows with implication for segments of the financial markets. It also finds increasing challenges for emerging markets and developing economies and has noted this in its latest Financial Stability Report 2015.

Moreover, it sees some similarities with the Greek situation, though many would aver this is far-fetched. As is happening in Greece since 2008, Indian banks too have profit margins falling, accelerated by the corporate sectors’ decreasing debt repayment capabilities. Undeniably, the corporate sector is the largest defaulter causing losses to banks.

Remember, the Greek crisis also started with banks high fiscal deficit ---- Government spending, high monetary outgo due to collapse of manufacturing and production, heavy dependence on imports and bail-out packages of Euro zone and the International Monetary Fund (IMF). Pertinently, Greece today owes over Euro 3.5 billion to ECB to be paid by July 20 and $ 1.7 billion to be paid to IMF immediately.

In fact, Greece will need an extra Euro 50 billion ($55bn) over the next three years to stabilise its finances under the existing, disputed bailout plans, the IMF asserts. No doubt, Greek banks are solvent on paper but have virtually minimized withdrawals to minimum. And if a Greek bank goes bust, it could create havoc in the financial markets because Greece has not put in place European rules for the orderly shutdown of failed banks.

Notably, a referendum to remain in Europe or not, might change western politics. Recall, Greece had more as pressure tactics on US and Euro zone opposed sanctions on Russia over the Ukraine issue and was even inclined to be Russia’s ally.

As Greece is part of NATO, a shift could throw Europe in to turmoil, send world currencies, particularly the euro, tumbling, shoot dollar rates and could present severe policy level challenges for India. Yes, it could accelerate the fall of the rupee, increase petro prices and make all imports expensive. Which, in turn, might lead to severe inflation.

Further, Greece could default on its debts, thereby triggering a chain reaction wherein the country could fall out of the Euro, the currency 19 European countries use. As it stands the tiny nation and creditors are struggling to agree on terms to get more loans to Greece. If it does not get a loan and is forced to exit, one has to see how EU holds together.

Indeed, many feel without Greece the euro zone might actually be more stable.

However, this may be incorrect. If one looks beyond Greece, the threat of further conflict within the Euro is all but inevitable. Although Greece’s departure would prove the Euro is not irrevocable, nobody would know what rule-breaking could lead to expulsion.

Nor would it resolve the inevitable polarisation of debtor and creditor Governments in bail-outs. If the single currency does not face up to the need for reform, then this crisis or the next will witness more Greece’s, more blunders and more dismal weeks. In time, that would wreck the Euro and the EU itself.

Additionally, but for France and Germany to some extent, most other EU economies are hit at different levels. It is just not Greece which has over 150 per cent of its GDP as debt, other countries too have around 100 per cent as debt. Clearly, signifying, the EU boat is rocking.

Undoubtedly, that affects India and it might have many fall outs. The country’s software and engineering exports could take a hit and India might also face larger capital outflows due to a weaker euro. Exports from India would be impacted negatively if the EU is hit by the Greek crisis.

The engineering exporters’ body EEPC India has made plain that the Greek economic crisis would impact engineering exports the country as EU is the largest destination for such shipments. Alongside, it sees an indirect impact from the UK, Italy, Turkey and France.

Asserted Finance Secretary Rajiv Mehrishi, “The Greece crisis may see interest rate firming up in Europe. In that case, there can be outflow of capital from India.” Added Assocham, the Indian economy is not really centric to Greece directly but if EU is impacted due to this, then India could be affected.

Both the Foreign and Finance Ministries are keeping a close watch on the evolving Greek scenario. As it stands, Europe is recently hit by severe exodus from West Asia and North Africa. The large migration is hitting its economy, financial and political stability.

Importantly, the impact of these on the Indian economy is yet to be assessed. One possibility might be that Europe could set stringent conditions for Indian jobseekers.

The other is still graver. Europe may not have enough finances to employ people. In other words, Europe could have severe unemployment, productivity might hit a low and could lead to the collapse of a thriving Indian export market.

What should India do? There is hardly any other area that can match the financial capability of Europe. It has to look for new markets but before that it must find ways to carry on Make in India. For this, Prime Minister Modi might have to change many policies to sustain it along-with strengthening the purchasing power capacity of an average Indian buyer.

In sum, the Greek tragedy can be an opportunity. India needs to take a relook albeit in a different way. It might gradually have to peg its moves beyond Europe. Emperor Alexander made India look to the West; Greek Prime Minister Alexi Tsipras may help India look away from it! ---- INFA

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