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    What if Greece leaves the Eurozone?

    Fatih Özatay, PhD23 February 2012 - Okunma Sayısı: 1249

    Many experts argue that the only viable option for Greece is to leave the Euro and return to the Drachma.

    Here is the million-dollar question: What is the risk that the recent development about Greece will change the risk appetite across international markets, affecting the level of fund inflows to Turkey and thus the 2012 growth?

    I will not mention the economic program approved by the Troika as it was covered in detail by the press. I just want to say that the approved program is quite harsh and strict. Right after the approval of the plan, the external media raised numerous times that the road ahead Greek was dead-end. Many experts argue that the only viable option for Greece is to leave the Euro and return to the Drachma. A considerable part of experts expect such an attempt by the end of 2012. In this line, I advise you to two read two interviews with two economists, one German and one American, broadcasted on Der Spiegel internet edition in English on February 20. 

    Two critical questions
    When it comes to the influences on Turkey’s growth in 2012, recent developments in Greece must be assessed in two different aspects. I have two questions. First, what happens if it becomes more likely for Greece to leave the Eurozone? Second, what happens if the status quo is preserved until the possibility for Greece to leave the Eurozone comes to broad attention? In other words, what happens if Greece continues to get on and off the agenda, occasionally leaving the headlines to some other county, to Portugal let’s say?

    The shortcut answer of the second question would be, “Hopes on Greece have been given up for long.” This would cast aside any further consequences. Since the end of December, European Central Bank, ECB, and the Federal Reserve of the US, FED, took important steps: the former lowered interest rates and initiated a massive quantitative easing. Also, the ECB will extend three-year maturity loan by the end of 2012. FED announced that it could introduce a new quantitative easing scheme if necessary and that interest rates would not be raised by the end of 2014. These steps, though did not overcome the deep-rooted problems of troubled countries, earned them time for introduce measures.

    Besides, these steps prevented the severe liquidity problems of the troubled banking systems from causing capital inadequacy and thus turning into a deadlock. The liquidity injected to the system has been flowing towards emerging countries which have growth prospects and do not suffer from the problems which developed countries have been bearing. Turkey is among those, too. If a country other than Greece does not surprisingly come to the agenda and if European banks do not shrink their size to fulfill the capital requirements (as was feared during the second half of 2011), fund flows towards Turkey and peer countries will not halt. Under these circumstances, Turkey’s growth in 2012 will be determined mainly by the export performance which is dependant to Europe’s growth, and developments about domestic credit supply. 

    How long will the turmoil last?
    It is difficult to answer the second question, however. It is evident that, if realized, the decision of Greece to revert the Drachma will cause a severe turmoil across financial markets. What is uncertain is how long the turmoil will last and whether or not other troubled countries also will have to revert from Euro. If things evolve negatively, we have to expect a sharp drop in risk appetite. And the duration of a possible turmoil will depend on the persistency of the turmoil. Obviously, should the turmoil last long, foreign fund inflows towards Turkey will drop considerably and growth performance will be affected negatively. The possibility of Greece leaving the Euro might influence Turkey’s growth performance only if expectations to this end intensify before the end of 2012. Though experts increasingly voice this possibility, such climate is not felt among markets yet. Let’s wait and see.

    This commentary was published in Radikal daily on 23.02.2012