Economists: Greek euro exit threatens ‘deep recession’ in Malaysia

By Shannon Teoh

May 30, 2012

Supporters of the extreme-right Golden Dawn party sing the Greek national anthem during a rally in Athens May 29, 2012. — Reuters pic

KUALA LUMPUR, May 30 — A Greek departure from the euro zone would cause a second recession in as little as four years in Malaysia as the repercussions may be felt throughout the global economy, Bloomberg reported analysts and economists as saying today.

 

Economists told Bloomberg that investors are now betting on the small Mediterranean country leaving the euro zone soon.

Although Greece is only responsible for 0.4 per cent of the world economy, anxiety over the June 17 Greek elections has already helped wipe almost US$3 trillion (RM9.5 trillion) from global equities this month.

A Greek exit from the euro zone could reduce China’s expansion to 6.4 per cent this year, from 9.2 per cent in 2011, economists at China International Capital Corp (CICC) said last week.

Malaysia, along with the rest of Asia, has increased trade with China for years and the Asian giant is now its top trade partner.

But the world’s second-largest economy is cooling and a further slowdown means its consumption “cannot fill a US and EU-sized hole,” as the Wall Street Journal put it in a recent analysis of the global economy.

“A euro-region crisis would also mean a ‘renewed, deep recession would be highly likely in Hong Kong, Singapore, Malaysia, Taiwan and Korea’,” Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse, was quoted as saying by Bloomberg today.

The business wire added that “Prior-Wandesforde calculated that exports to the euro zone account for more than five per cent of total GDP in Hong Kong, Singapore, Malaysia, Thailand and Taiwan.”

Malaysia has reported a 4.7 per cent GDP growth for the first three months of the year, a third consecutive quarterly drop since it posted a 7.2 per cent increase in the second quarter of 2011.

Analysts have warned Malaysia to brace for a significant slowdown here due to rising linkages with top trade partners including China, which economists say is headed for a sixth consecutive quarterly drop in growth, with worse to come.

Chinese exports, 19 per cent of which go to the European Union, slowed unexpectedly in April. They may fall 3.9 per cent this year if Greece exits the euro, compared with a 10 per cent gain without an exit, CICC projected.

Citigroup economists, who earlier forecast chances of the departure at as much as 75 per cent, are now assuming as a “base case” that Greece will leave at the beginning of 2013, according to Bloomberg.

It also reported that Bank of America Merrill Lynch strategists estimate the euro-region’s GDP would contract at least four per cent in the recession that follows, similar to the decline after Lehman’s 2008 collapse that resulted in the global financial meltdown.

“A Greek departure from the currency would inflict ‘collateral damage,’ says Pacific Investment Management Co’s Richard Clarida, a view echoed by economists from Bank of America Merrill Lynch and JPMorgan Chase & Co.

“At worst, it could spur sovereign defaults in Europe as well as bank runs, credit crunches and recessions that may spark more euro exits,” Bloomberg reported today.

Institute of International Finance managing director Charles Dallara also told Bloomberg the cost of a Greek exit would probably exceed the €1 trillion (RM3.9 trillion) it previously estimated.

According to the financial wire, JPMorgan Chase estimates a one percentage point slump in the euro countries’ economy drags down growth elsewhere by 0.7 percentage point.

Other countries facing sovereign debt crises such as Portugal and Spain, would also incur higher borrowing costs.

“If you let Greece go you would be sending the message that being a member of the euro zone is not necessarily permanent, which could be a disaster for some countries,” Laurence Boone, chief European economist at BofA Merrill Lynch in London, was quoted as saying by Bloomberg.

The euro has dropped about five per cent in the past month against the dollar, while the cost of insuring Spanish government and financial debt reached a record high this month.

European banks alone hold US$1.2 trillion of debt issued by Spain, Portugal, Italy and Ireland, according to the Bank for International Settlements in Basel and a regional crisis would likely see them pull back the €5 trillion invested in the rest of the world.

Malaysian Insider