How Greece's Eurozone exit would affect Israel

At first glance, the possibility of a financial disaster in Greece seems none too significant for Israel, but the significance of Greece’s current crisis is not limited to its borders.

June 18, 2015 19:36
4 minute read.

A man holding a Greek flag walks on central Syntagma square in Athens.. (photo credit: REUTERS)

At first glance, the possibility of a financial disaster in Greece seems none too significant for Israel.

Israel’s direct exports to Greece were about NIS 460 million in 2014, representing just 0.7 percent of all exports, hardly making it the most significant of Israel’s trading partners.

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Israeli banks and financial institutions don’t seem to have heavy exposure to the flailing euro-zone member, meaning whatever defaults might be in store shouldn’t be too big of a problem.

But, of course, the significance of Greece’s current crisis is not limited to its borders.

On Thursday, finance ministers from the euro zone met to discuss the possibility that Greece will default on its loans and eventually be forced off the common currency. Greece has a roughly €1.5 billion loan repayment due to the International Monetary Fund at the end of the month, and has billions more in loans due throughout the summer to its various European creditors.

Unless it can convince the IMF, European Commission and European Central Bank (known as the Troika) to bail it out again, Greece will default on its debts, which will likely lead to its eventual exit from the euro and perhaps even the European Union. The Troika insists that Greece carry out more painful reforms before getting another euro dime. But Greece’s Prime Minister Alexis Tsipras’s far-left Syriza Party was elected explicitly on a platform of rejecting such reforms. Indeed, austerity has taken a tough toll on the Greek economy, making its debt position even less sustainable and many of its citizens rely on payments from the overwrought pensions system the Troika wants to see further restructured.

Pessimism has settled in among all sides, and the possibility of a “Grexit” suddenly seems significantly higher than it did just a few weeks ago.

“The Eurogroup’s meeting this Thursday could well be the last chance to get any disbursement ready in time for the bundled payment to the IMF on 30 June, but we are not holding our breath,” Bank of America Merrill Lynch Global Research wrote in a report Thursday.

But why should Israel care? First and foremost, if Greece does indeed break the euro, it will create a precedent that destabilizes the currency.

Until now, investors in euro countries have held to the belief that countries on the currency had institutional and financial backing and would not be allowed to leave.

“Now assuming that Greece is on its way out, Europe won’t fall apart, but it immediately raises the questions ‘who’s the next country to go,’ so it weakens the euro,” said Ofer Klein head of the Economics and Research Department at Harel Insurance and Finance.

If Greece exits stage left, who’s to say Spain and Portugal won’t follow? The pressure will be up, the cost of borrowing in the euro zone will follow and the currency will weaken.

Given that Europe is Israel’s largest trading partner, accounting for about a third of its exports, that will have a big effect on Israel’s economy. That kind of shock could also shake other markets that are important to Israel.

On Wednesday, Federal Reserve Chairwoman Janet Yellen warned about its destabilizing effects.

“In the event that there is not an agreement, I do see the potential for disruptions that could affect the European economic outlook and global financial markets,” Yellen said.

Klein said that there are political implications as well. If Greece is on the outs with Europe, it will look for other sponsors. Ominously, Tsipras met with Russian President Vladimir Putin Thursday. Furthermore, a weakened Greece will weaken its EU ally Cyprus, while emboldening archrival Turkey, which has had a chilly relationship with Israel of late.

Considering the delicate negotiations on gas cooperation with Cyprus and Turkey in the Mediterranean, that kind of an upset could have significant implications for Israel.

“Israel prefers Greece to stay in the euro. If it causes an earthquake in Greece and Cyprus, it’s bad for Israel both economically and politically,” Klein said.

Of course, despite the pessimism, it is worth keeping in mind that it is in nobody’s interest to have Greece depart unceremoniously from the euro zone, just as it is in nobody’s interest to strike a deal before the very last minute.

The brinkmanship is likely to continue far beyond the comfort zones of any side. As BofA Merrill Lynch said, even a Greek default might not lead to its exit from the currency.

“If no deal is found we think that Europeans would seek to create a ‘gray territory’ trying to avoid a Grexit after a default,” the report said.

As Israel struggles to overcome its own economic challenges, it should watch the events in Greece closely.

As so often happens when the country is looking inward, the significant shocks to the economy may come from the outside.

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