Fearing Grexit, analysts suggest Korean response

The European Union summit on a bailout for Greece scheduled on Sunday has been canceled, and only the Eurogroup meeting of EU finance ministers is still on the schedule. With the new uncertainty, which has become standard, Korean researchers have been busy trying to estimate likely outcomes and what impact they would have on exporters here.

Unsurprisingly, the researchers say Korea should prepare for all possible scenarios, from an immediate settlement to a failure of the talks. The latter outcome, they say, could lower Korean exports to the euro zone by almost 6 percent.

The Institute for International Trade under the Korea International Trade Association released a report Sunday that discussed the best-case outcome (quick agreement), the worst case (breakdown) and a middle scenario in which negotiations would continue to drag on.

The optimistic scenario would be one in which the EU and Greece do manage to find an agreement Sunday in the thicket of charges, countercharges and bluffs that have characterized their negotiations so far. The institute said that even a delay of a few days in finding common ground would be cheerful news, given continuing worries about the negotiations and the effect on finance and trade.

Progress but no agreement on Sunday, the institute continued, would mean that the European Central Bank would be likely to allow some emergency liquidity assistance immediately. It estimated that a third lending tranche for Greece, given some progress, could amount to between 30 and 50 billion euros ($33.5 billion to 55.8 billion), the report said.

That would stabilize the global financial markets and avoid a blow to Korea’s EU exports. But even with a patched-together settlement, the Greek debt problem would still remain and keep worries about a default and uncertainties in global financial markets alive.

The negotiations may be extended for a lengthy period of time if Greece’s reform proposals don’t satisfy the creditors’ expectations or if the two parties can’t reach an agreement on partial debt relief. That, the institute said in discussing its “middle scenario,” would mean financial markets would remain unstable, dragging down the Eurozone economy’s growth. Even if a third relief loan program for Greece began some time soon, Korean exports to the EU could drop because of slowing EU growth.

The report said that the worst case scenario, in which Greece and the creditors fail to reach an agreement and Grexit becomes a reality, could result in a drop in Korea’s export volume by 6 percent as the EU economy stalls and the euro drops in value.

The Bank of America earlier issued a forecast that a Grexit could drag down the overall eurozone’s growth by 1 percentage point. It noted that the euro’s value against the won depreciated by as much as 13.6 percent during the height of Greece’s first debt crisis in 2010.

The Greek negotiations with its creditors may fail, the central bank report said, if the two sides can’t quell mutual suspicions during Sunday’s talks or if an EU member objects to the settlement on the grounds that giving Greece another chance would be unfair, given what other EU members had to endure to obtain their earlier relief programs.

The institute’s report said the impact of Grexit on Korea would be weaker than that during the euro zone crisis in 2012, because the possibility that a Greek withdrawal from the euro would slam the economies in the EU’s southern tier is relatively low, thanks to the Euorpean Central Bank’s quantitative easing policy.

“The negotiations should be settled in a short period of time,” said Park Sol, a researcher at the institute, “but the Korean export community still has to have measures ready against potential risks such as volatility in foreign exchange and oil prices that could happen if the Greek crisis lingers.”

Park added, “The Korean government and exporters should keep following the Greek situation to prepare responses, while at the same time, keep paying close attention to the local economy’s structural changes that are aimed at long-term development.”

BY KIM JI-YOON [kim.jiyoon@joongang.co.kr]