Spend Matters welcomes this guest post from Avneet Deol of Mintec.
On May 30, Greece officially defaulted on a debt repayment of €1.5 billion to the International Monetary Fund (IMF). Then, on July 5, more than 60% of Greeks voted against the terms of a bailout deal and austerity measures submitted by its creditors. Since then, there has been much speculation as to what this could do to the eurozone and other international economies. Following 17-hour talks at an EU summit in Brussels on July 12, and as concerns over the Greek exit from the eurozone ease, we look at what effect the Greek crisis has had on the global market.
The Asian markets were the first to react to the default, and stocks fell more than 3% in Hong Kong and Japan on May 29, even before the missed payment. Even though anticipated, the news caused US stocks to close at their largest loss for 2015. The Dow Jones fell 2.0%, NASDAQ was down 2.4% and the Standard & Poor's 500 index dropped by 2.1%. European stock markets also slipped, with the German DAX falling 3.6%.
Of course, the effect of the Greek crisis has not been limited to just stock markets. Crude oil prices have also reacted, due to the effect on currencies. The euro has fallen, weakening 2% against the US dollar since mid-June. That has added downward pressure to crude oil prices, which is traded in dollars. As a result, the West Texas Intermediate crude benchmark has fallen 8% since the start of July. Other dollar-traded commodities have followed similar trends.
The Greek crisis is expected to have a negative impact on the economy in the eurozone, but it is unclear just how much, as Greece accounts for less than 2% of the eurozone GDP. Despite the initial global market reaction, the markets are uncertain how much of an effect it will have on other economies. The likelihood of the US being impacted by the crisis, if at all, is limited by the lack of direct exposure between the US and Greece. In 2014, US exports to Greece totaled $772 million, less than 0.5% of the total export value. Still, a prolonged economic crisis in the eurozone, which accounts for more than 20% of US exports, could reduce demand from the US.
It is widely accepted that major exporters would have been more concerned if Greece had exited the eurozone, which could then affect other eurozone countries. In Spain, for example, left wing parties opposed to austerity prevented the People’s Party and the Spanish Socialist Workers' Party from reaching majorities in all but one region in the May elections. For the moment, Greece has avoided becoming the first country to leave the eurozone, but experts believe that the exit could still happen in the future.
Eurozone leaders reached an agreement to offer Greece a third bailout deal at the July 12 summit. This gave Greek Prime Minister Alexis Tsipras 72 hours to push through reforms on tax and pensions before the EU released any emergency funds to avoid bankruptcy. The MPs approved the measures and the €86 billion bailout deal will go ahead. Nevertheless, the Greece crisis is far from over, as the agreed reforms go much further than the bailout terms and austerity measures that the Greeks didn’t want. This has resulted in violent protests on the streets of Athens.