Dubai: Greece has announced capital controls Monday until July 6, causing massive disruption in payments to and from Greece, impacting people doing business with Greek companies and banks.
The decision to shut down banks that followed the announcement from the European Central Bank’s (ECB) decision to freeze the ceiling on its Emergency Liquidity Assistance (ELA) to Greek banks has brought transactions with Greek companies to a grinding halt.
A ban has been imposed on banks on payments and transfers abroad, while there is also a limit to daily cash withdrawals of €60 (Dh245). The cashing of cheques will be halted and fixed term deposits will be locked down.
“There is total uncertainty on payments through Greek banking channels. Clearly there will be delays in payments for those doing business with Greek counterparties. But we expect payment commitments will be honoured once there is clarity on the status of Greece in the monetary union,” said Treasury head of a local bank.
Eurozone finance ministers on Saturday refused a Greek request to extend the bailout programme which is scheduled to end on Tuesday, leaving the fragile Greek financial system exposed. Having failed to secure a deal with its creditors, at this point, it seems that Greece will miss its €1.6 billion repayment to the International Monetary Fund (IMF) on Tuesday June 30, officially putting the country into a default.
Analysts say if Greece is to exit from the euro could send shock waves through the financial markets and the impact could be felt on asset prices across the world, but a contagion could be contained depending on Europe’s ability to ring-fence assets from the impact.
“While we agree with market expectations that a default of Greece on its obligations to the International Monetary Fund on June 30, is close to a 100 per cent probability, we do not think that such a non-payment would cause a meltdown in bond or stock markets for three reasons. First, such an event is being highly anticipated. Second, almost all Greek government bonds are owned by public institutions, which will neither panic nor default themselves. Third, sadly enough, Greece really does not produce more than 2 per cent of European gross domestic product and will thus not become a ‘Lehman moment’,” said Burkhard Varnholt, CIO, Julius Baer.
Economists say the impact of capital control and a potential exit of Greece from the euro will have minimal direct negative impact on GCC economies.
“There is very little direct impact on the GCC economy from events in Greece as most of the Greek debt is held by the Troika (IMF, European Commission and European Central Bank). The key transmission mechanism for the GCC is the euro exchange rate against the US dollar, and we expect further weakness on this front, with the EUR forecast to reach parity on a six month view,” said Khatija Haque, Head of MENA Research at Emirates NBD.
With currency being the key transmission mechanism that links Greek crisis to GCC, some analysts say Grexit could lead to potential investment losses for GCC investors in euro denominated asset classes while a potential contagion could shrink investment values.
“Risk aversion over the coming days leading up to the Greek referendum on July 5 will likely be elevated, and there are no guarantees that voters will eventually decide to accept the latest bailout conditions on offer. Although Greece only accounts for 2 per cent of Eurozone GDP, the fear is that the rising risks of ‘Grexit’ undermines broader sentiment towards the periphery, and we expect the ECB will need to play a key role in helping to contain the crisis over the coming weeks,” said Jean-Paul Pigat, Senior Economist at Emirates NBD.
Heightened volatility in the euro exchange rate in the context of Greek debt crisis has been in the headlines since the beginning of this year. Thus analysts believe Grexit will not be a ‘Lehman moment’ for GCC investors. Wealth managers say all investors including GCC central banks, sovereign wealth funds, institutional investors and high networth Individuals had enough time to cover their positions. “I am sure regional investors are adequately covered. It is difficult to imagine people have not hedged their positions in the face of such long-drawn volatility,” said Rohit Walia, executive chairman of Alpen Capital and Alpen Asset Advisors.
