Complex Made Simple

GCC and the Greek soap opera

The Greeks have spoken and it is an emphatic “No” to the European Union bailout offer.

Call it a Greek tragedy or a Greek awakening, but the atmosphere was like a ‘big fat Greek wedding’ at Syntagma Square in Athens.

Around 61 per cent of the voters in a referendum held yesterday voted out the bailout offer proposed by the EU hawks – Germany and France. Once the results of the referendum initiated by the leftist government of Prime Minister Alexis Tsipras were out, celebrations and drumbeats were heard across Brussels – the city that houses the European Union’s headquarters.

These dramatic developments in Athens, followed by ripple effects across Europe, will certainly affect markets in the oil-rich Gulf countries. National Bank of Abu Dhabi’s global wealth chief investment officer and head of investment strategy, Gary Dugan, says: “Oil has sold off aggressively on worries that the Greek situation will damage global growth. The fall in oil prices will put the GCC equity and bond markets under downward pressure. When Greece originally blew up as an issue, the oil price was above $100 and hence GCC credits were seen as a safe haven. That will not be the case today.”

Talking about the impact in the GCC, Dugan says: “There will be an immediate negative impact on all global financial markets, including the GCC.

“We see equities falling two to four per cent. If the markets break crucial technical support levels, then the losses could be greater – possibly as much as ten per cent. We would see that as long term buying opportunity.

“Bond markets will be pulled two ways – in the first instance, US government bond yields should fall as investors rush to the safety of US government bonds, whilst the yields for riskier bonds such as GCC credits might rise relative to the US due to investors buying only the safest assets in such uncertain times. The economic impact will depend on the extent to which eurozone economic activity is damaged by this crisis,” he says.

Tim Fox, chief economist at Emirates NBD, is of the view that there will be a limited impact. “There is very little direct impact on the GCC economy from events in Greece as most of the Greek debt is held by the Troika (IMF, European Commission and the European Central Bank).

“The key transmission mechanism for the GCC is the Euro exchange rate against the US dollar and we expect further weakness on this front, with the EUR forecast to reach parity on a six-month view,” says Fox.

This article was first published in TRENDS, a sister title of Aficionado.