New York (HedgeCo.net) While hedge funds and institutional investors alike are mainly concerned with the sovereign debt and stock market in Greece, there could be a bigger concern in the long run and that is the geopolitical environment.
During the fifth annual Delivering Alpha conference in New York last week, a panel that included Richard Perry, CEO of Perry Capital, and Mary Callahan Erdoes, JPMorgan Asset Management CEO, addressed the potential consequences of Greece’s issues from a political standpoint rather than an economic viewpoint.
Ms. Erdoes stated that “Greece is a more a humanitarian issue than an economic one.” The concern being that if Greek citizens don’t see an improvement in their economy, they could turn more desperate and seek more radical solutions to their problems. Mr. Perry wondered which EU nation “the next Syriza Party would come out of,” referring to Greece’s radical left-wing party.
From the viewpoint of economic importance, Greece isn’t among the top economies of the world. According to the CIA World Factbook, the country ranks 66th in GDP per capita. Conversely, Greece ranks third in debt as a percentage of GDP at almost 175%, behind Japan and Zimbabwe. For comparative purposes, the United States ranks 39th at 71.2%. It is estimated that 44% of the Greek people live below the poverty line and the unemployment rate of 26.8% is higher than 174 countries in 2014.
The importance of Greece is tied more to its geographical and trade position than its economic stature. The biggest trade partner to Greece in terms of imports is Russia and their biggest export partner is Turkey. Should Greece not reach an acceptable deal with European Union, they could turn to either Russia or Turkey for help and in both instances there are concerns. Russia is a concern as Vladimir Putin seems to be looking to increase his country’s influence in the region and a deal with Greece could give the country access to the ports it so desperately wants. Turkey has historically been an adversary of Greece, but with the country becoming more authoritarian and doing better than Greece economically, this could influence Greeks.
As these developments transpire, what happens in Greece could influence the rest of the European continent. If the citizens turn to more radical political parties for answers, the risk is that they are successful in improving the economic conditions and other countries take notice. A possible contagion of exits from the EU could transpire and other debt-laden countries could choose a similar path. Remember the PIIGS countries from a few years ago? The acronym stands for Portugal, Ireland, Italy, Greece and Spain and it was used to describe heavily indebted countries. In terms of debt as a percentage of GDP, all five of these countries still rank in the top 15 with all but Spain’s debt percentage being over 100% of GDP. Spain’s percentage is 97.6%.
Geopolitical issues were seemingly put on the back burner during the bull market of the last six years, but should Greece exit the EU and in turn succeed in rebuilding their economy and escaping their debt, you can bet that the people of Portugal, Ireland, Italy and Spain are going to take notice. If these countries were to leave the EU as well, the power and authority of the EU would be greatly compromised and in the long run it could lead to the collapse of the EU as an economic entity.