TalkingEconomics: Emerging markets summary July 2015

Direct links between a Greek exit (Grexit) and emerging markets (EM) are limited, but there is always the risk of contagion.


Craig Botham

Craig Botham

Emerging Markets Economist

Will a GREXIT hit emerging markets?

An oft-cited ancient Greek story tells of the prophetic powers of the oracle at Delphi, which King Croesus consulted when deciding whether to attack Persia.

The oracle’s advice was supposedly: “If you cross the river, a great empire will be destroyed”. Croesus duly attacked, full of optimism, and saw his own empire destroyed as a result.

The discussion around a possible Grexit tends to focus on the damage to Greece and the eurozone. What if, though, like Croesus, the focus is on the wrong kingdom? Could Grexit trigger a broader based EM problem?

Trade links are limited

Greece itself does not rank as a major export partner for any large EM economy.

Although about 10% of its 2014 imports came from Russia, this amounts to just 1% of that country's total exports.

Elsewhere, EM exports to Greece rarely exceed 0.5% of GDP, and are usually lower.

It should be noted that we believe the economic impact of a Greek exit on the eurozone would be limited, however, so any disruption on eurozone trade would be temporary at most.

Financial links are more concerning

Data from the Bank for International Settlements (BIS) shows minimal EM claims on Greece: out of a total $67 billion in foreign bank claims on the country, only $47 million are from EM banks (and these are almost entirely Turkish).

However, going the other way, Greek banks retain significant claims on some EM countries, concentrated in the Central and Eastern European (CEE) region.

Typically, these are small economies however, and claims on the larger CEE nations like Poland and Hungary are minimal. One possible area of concern is Turkey, for whom Greek banks account for around 12% of all foreign bank claims ($31 billion).

From a eurozone perspective, bank claims on Greece are, according to our banks analyst, typically collateralised, and generally represent only a small share of bank assets, such that Grexit is not a threat to eurozone banks. Only contagion risk poses a concern.

A poisoned well

If a Grexit were to occur, it may be that as with the "Taper Tantrum" of 2013, a wide range of EM economies sell off at first, but stronger economies (as measured by fundamentals) recover these losses quickly.

If we were to raise any concerns at all, they would centre on Turkey, which is connected to Greece through trade, finance, and geography, as well as reliant on international finance generally.

If Turkey were to fall, the risk of contagion to the rest of EM rises considerably, particularly for those economies also heavily reliant on foreign capital flows: the rest of the Fragile Five (bar India) and some other Latin American countries.

It is a tail risk, but we cannot completely rule out the fall of an empire should Greece cross the river out of the eurozone.