Asia warned on effects of Greek debt woes

MANILA, Philippines—Asia must brace for a bumpy ride ahead while financial markets await the outcome of either Greece bolting out of the beleaguered European Union or banks accepting significant losses from their exposure to Greek debt, a visiting economist from Dutch financial giant ING said on Tuesday.

In an interview, Amsterdam-based ING economist Padhraic Garvey said the fiscal woes of Greece – more than any concern on the sluggish US economy – were mostly driving investors’ risk aversion at present. And the prognosis would not be good if the problem remain unresolved, he said.

Garvey, who heads ING’s global head of developed debt and rates strategy, assigned a 75 percent probability that creditors would end up taking a big hit from Greek debt rollover and a 25 percent probability that Greece would leave the European union.

“We’ve got to be looking at any of those two as a means to bringing this to an end,” Garvey said, noting that without either of such drastic solutions, the debt problems in Europe would drag on in the next few months.

“But it seems that European politicians are very close to getting to that point,” Garvey said, noting that the decision might come very soon.

“The Germans, Dutch and Fins are getting sick of this. The French are more tolerant but the real core of Europe have had enough…We’re getting close, very close to something happening,” he said.

The economist said the prospects of Greece leaving EU might not be too bad in the long run, noting that this state should not have been part of the union in the first place.

“If they left, you could imagine that Euro-zone would be in a better place,” Garvey said. “It should be good but it won’t feel very good immediately because you’d have the fear of contagion.”

Garvey added that Portugal would come under pressure if Greece left the union.

This developed amid reports that a German politician had suggested that Greece might have to leave the coalition of 17 countries that have been using the euro as their common currency.

The German economy minister also issued a statement that an “orderly bankruptcy” of Greece must be an option.

Based on the current scenarios, Garvey said the debt-swap arrangement being worked would be good for Greece’s creditors.

“The Greek (debt) exchange/rollover is a fantastic solution but the risk is that this isn’t what’s going to happen, that there will be some haircut. I’m not convinced this is the solution. This is just a smokescreen and I still think we’re going to find a significant haircut risk,” Garvey said.

The next big redemption for Greek bonds is December so everyone wants to see what the final restructuring will be by October, he said.

In the case of the US, Garvey said growth would likely remain subdued but not necessarily succumb to a recession as defined by 12 months of falling GDP.

Risk aversion will likely remain for as long as the EU problem is not resolved but China and the rest of emerging Asia are at least “still in decent shape,” according to Garvey.

Given what’s happening in the West, Garvey said it’s likely that monetary policy could be eased in the Asian region, reversing the trend of monetary tightening pursued in recent months that was in turn meant to address rising inflation.