A country accounting for less than 0.4 percent of the world economy is again rattling those responsible for three-quarters of it.
Greece topped the list of worries for Group of 20 finance chiefs as they started talks in Istanbul on Monday with calls for the nation and its creditors to strike a new aid deal amid concern its membership of the euro has never been more tenuous.
Although global economic growth and Europe’s defenses are both stronger than when Greece flirted with exit from the single currency three years ago, leaving now would still shock financial markets. That could trigger a flight from risk by investors, bank runs and another downturn in European demand.
“Compromise is clearly going to be needed, but the situation is very serious,” Canadian Finance Minister Joe Oliver said in an interview in Istanbul. Chinese Vice Finance Minister Zhu Guangyao said “what happens in Greece will have a really big impact on the euro zone and the global economy.”
Two weeks since taking power, Greek Prime Minister Alexis Tsipras remains on a collision course with his country’s creditors after rejecting the austerity-oriented terms of its bailout program. While all parties profess to want Greece to remain within the euro, they’re also holding out its departure as a threat.
In the U.K., Prime Minister David Cameron chaired a meeting between Treasury and Bank of England officials to discuss the potential impact of Greece parting ways with the euro.
“People would expect the government to look at a range of contingencies” given the global financial system’s “range of interdependencies,” Cameron’s spokesman Jean-Christophe Gray told reporters in London.
For Greece alone, University of California-Berkeley professor Barry Eichengreen said last month that fallout from a departure would be “Lehman squared,” evoking the financial turmoil and recession that followed the 2008 collapse of Lehman Brothers Holdings Inc.
“Monetary-union breakups are very rare for a reason: they’re a disaster,” said Paul Donovan, a global economist at UBS Group AG in London, who sees a “good chance” others would follow Greece out of the currency area and that a collapse could prompt a global recession.
Donovan and colleagues yesterday published a report warning investors are “complacent” about the financial and economic disruption if Greece left. Exit would pose the potential for runs on European banks and an asset sell-off amid questions over the ability of policy makers to make good on promises to protect the region, the report showed.
For a start, the loss of Greece would reveal that membership of the euro isn’t irrevocable. That could prompt investors to focus on the markets of the euro area’s weaker countries, such as Cyprus, Ireland, Spain, Portugal -- and perhaps even Italy.
At the very least, European countries would end up paying more to borrow on markets and their equities would be tainted, said Charles Collyns, chief economist at the Institute of International Finance, who sees a 25 percent chance Greece leaves.
Banks would be particularly targeted because they still have exposure to Greek debt and companies whose liabilities would be redenominated in a weaker exchange rate, UBS said. The risk of broader bank runs would mount the more questions were asked about whether others would follow Greece out.
“There is a meaningful risk that other countries would join Greece in leaving the euro,” it said. “The euro is patently not an optimal currency union at the moment, which gives economic momentum to the idea of a broader fragmentation.”
Euro-area banks could freeze credit, which has already been contracting since May 2012, especially across borders. Bank of England Governor Mark Carney, who heads the Financial Stability Board that makes recommendations on international financial rules, said in Istanbul on Monday that he’s concerned about the cost-effectiveness of cross-border banking.
The European Central Bank would also be under the gun, according to UBS. President Mario Draghi would struggle to back his 2012 pledge to do “whatever it takes” to save the euro, perhaps ending up as the region’s sole buyer of the government’s paper.
All in all, the fallout of Grexit would heap fresh pressure on a euro-area economy that remains weak and where declining consumer prices have raised the prospect of a deflationary spiral. The European Union is responsible for about a fifth of global trade, meaning a slowdown there would be transmitted elsewhere.
Investors would also dump any international assets viewed as risky, such as emerging-market debt, according to Collyns, a former U.S. Treasury official.
“This would be a first-magnitude event that would certainly have a major set of stresses across markets,” he said.
Although expanding more strongly now than in 2012, the world economy isn’t completely shock-proof. Most major central banks are running short of ammunition with interest rates near zero and balance sheets bloated by past-bond buying.
Debt also leaves economies vulnerable. McKinsey & Co.’s research arm reported last week that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.
Fears that the 19-nation euro-area will shrink may still be overstated and a pact to return Greece to aid may soon be forged. French Finance Minister Michel Sapin said in Istanbul that “a solution is possible” and that Athens may be able to receive short-term support while negotiations continue.
“This is a Catholic marriage, not just between Greece, but all European countries,” said Turkish billionaire Husnu Ozyegin in an interview on Sunday. “It’s difficult to get in. It’s more difficult to get out.”
Some nevertheless say a Greek divorce would be a blessing after years of tension inside the bloc and the throwing of good money after bad. If the Greek economy were to suffer on the outside, those remaining may be more willing to overhaul their economies.
Former U.S. Federal Reserve Chairman Alan Greenspan told the BBC in an interview broadcast on Sunday that “it’s just a matter of time before everyone recognizes that parting is the best strategy.”
The “euro zone can withstand the loss and will be better after Grexit,” said David Kotok, chairman and chief investment officer at Sarasota, Florida-based Cumberland Advisors Inc., which oversees about $2.3 billion. “Feeding more to a failed system of governance only exacerbates the final cost.”
The world economy is more robust now to survive any aftershocks, with the U.S powering ahead. Europe has the 500 billion-euro European Stability Mechanism and Draghi’s “whatever it takes” commitment. Progress has also been made on stress-testing banks and forming a banking union.
“Today’s financial markets are much more resilient than they were three years ago,” said Roberto Nicastro, general manager of UniCredit SpA. “It seems there is less concern about potential contagion.”
For the G-20 officials gathering in Istanbul there’s little appetite to test that analysis as they urge Greece and fellow European governments to find common ground. An emergency meeting of euro-area finance ministers is scheduled for Wednesday.
“Nobody wants Greece to exit, not even the new government,” said China’s Zhu. “All sides want a strong euro zone.”