India Will Lose if it Fails to Capitalise on Greece Crisis

The emerging crisis in Greece will have an adverse impact on the Indian rupee and hit exports, writes Shishir Asthana

A ‘No’ in the Greek referendum is being read by financial markets as a collective voice of citizens of that country that they are willing to default on a loan commitment and be globally isolated than be bound by austerity. With nearly 55% of Greece’s youth population unemployed, mainly on account of spending curbs imposed by the Euro zone members on the country, it was only natural that they would have voted against further hardships.

So what does the crisis in Greece mean for India and Indian markets?

Since neither the Indian government nor any institution has lent money to Greece there will be no direct impact. But there are chances of collateral damage on us. To understand this let’s look at what is now likely to happen in Greece.

After the landslide vote, Greece will now negotiate from a position of strength. It has the backing of its people to default and face the consequences. A realistic scenario is that the country’s banking system will collapse because of a catastrophic government default and an eventual exit from the Euro zone. If other Euro zone members, led by Germany, do not soften their stand all the above scenarios can roll out immediately.

Greece imposed strict restrictions on withdrawal of money from banks and transferring money out of the country a week before the referendum. This caused a minor panic in the country, but that is nothing compared to what will happen if Greece quits the Euro zone. It will have to print its own currency, which will have far lesser purchasing power than what the Euro currently has. By one action the entire country will be poorer.

Exit Route by Others?

Unfortunately, Greece is not the only country in the Euro zone that is suffering a debt crisis. Peripheral countries like Portugal, Spain and Italy have high levels of debt and would like to take the route taken by Greece. Interest rates in these countries had already shot up last week as Greece headed for the vote.

The Indian market fears that these countries would also take the ‘exit’ route as a bargaining tool for better treatment. The concept of the entire Euro zone will be put to question. If the Euro zone is not able to keep itself united it would be catastrophic for global markets, but that is an unlikely scenario, at least as of now.

In any case the current events are enough to weaken the Euro against all currencies, including Indian rupee, but more importantly the dollar.

This has both a positive as well as a negative impact on India. If the dollar strengthens then US exports will fall which will further weaken the American economy. This in turn will prevent its Federal Reserve to increase interest rates. One of the bigger fears for emerging markets was the impact on them in the event of interest rates rising in the US, pushing away capital. A stronger dollar also impacts prices of other commodities such as oil.

The Indian Scene

But a stronger rupee would mean that Indian exports would be hit and would affect a pickup of the economy. A stronger rupee would also make imports costlier, especially gold, which has appreciated as world markets head into rough weather.

However, a crisis-like situation in Europe is good for Indian markets as money would come searching for calmer shores. A weak Europe and America and an increasingly vulnerable China is good for Indian markets.

There is still some hope that the Euro members will soften their stand and prevent Greece’s exit from the zone. In this scenario too peripheral countries would like similar treatment and relaxation of their payment terms and spending curbs. Even in this situation the Euro would depreciate, impacting other countries.

Indian markets in both the scenarios -- if Greece exits from the Euro zone or does not -- benefit from being one of the few destinations with steady growth. But in order to attract foreign investors, the government, and more importantly the opposition parties, will have to behave themselves and let Parliament function in an orderly manner. Going by recent developments, it is very unlikely that the opposition parties would allow the government to function. But it is the government’s responsibility to see to it that Parliament runs smoothly.

India would once again give away a golden opportunity to attract capital if it keeps cribbing over meaningless issues.

(The writer is a Mumbai-based market analyst)