The Greek earthquakeGreeks voted “No” in a referendum on whether to accept creditors’ demand for austerity. In the nationwide plebiscite held Sunday across the country, the Greek people rejected the creditors’ offer for an additional bailout in exchange for stringent measures by an overwhelming margin of 20 percent. The foreign media said Greece chose a path to fast death over a path to slow death. After the referendum, Prime Minister Alexis Tsipras declared a political victory and expressed the will to start negotiations with international creditors to save the country from default.
However, the possibility of Greece working out a successful renegotiation to save the country from national bankruptcy looks dim particularly given the critical lack of trust from creditors towards Alexis Tsipras, a political maverick and leader of the left-wing Syriza party since 2009. Germany, a major creditor, and other eurozone members will hardly change their positions overnight and write off a massive amount of Greece’s debts. In the end, the Greek people voluntarily chose a rugged - and hazardous - path that could lead directly to a “Grexit,” Greece’s departure from the eurozone comprised of 19 European nations.
The stunning decision of the Greek people immediately shocked global financial markets as seen in the steep plunges among major stock markets in Asia, including China and Japan. The Korean stock market also fell by a big margin on Monday afternoon and the value of the won fell as well. That means international markets perceive the possibility of a Grexit being real. If Greece leaves the eurozone, it will most likely have a tremendous impact on financial markets in Europe as well as in other parts of the world. Needless to say, if the repercussions from Greece trigger a chain reaction to southern Europe - including Italy and Portugal - it could affect other parts of the eurozone, which could again force the global economy to slow down. The Korean government must be thoroughly prepared before such a vicious cycle hits the country.
Our government thought the Greek impact on our economy would be minimal because our trade volume with Greece and investments in the country are relatively small compared to other European nations. The government also believed that there was little, if any, possibility that Greece would exit the eurozone. But the results of Sunday’s referendum in Greece say otherwise. The Korea Economic Research Institute forecast that if a Grexit really happens, our exports to Europe will decline by as much as 7.3 percent.
That heralds bigger damage to our exports. The Chinese economy, which directly affects ours, could also be drawn into a deeper recession down the road. No matter how many foreign exchange reserves we have - and no matter how solid our fiscal condition is - the global financial market is utterly unpredictable and capricious. It is time for our government to fully brace for the worst.
JoongAng Ilbo, July 7, Page 30