[SINGAPORE] From boardrooms to treasuries and trading desks, a breakup of the eurozone is now looking like a distinct possibility. Singapore is certain to feel the impact of a Greek exit ("Grexit") from the eurozone - now seen by economists as something that could happen in the next 6 to 18 months.
Citigroup has raised the probability of a Grexit in the next 18 months from 50 to 50-75 per cent; Bank of America Merrill Lynch thinks it is likely to happen within the next six months.
How seriously the potential currency impact, trade disruptions and poor sentiment rock Singapore's economy and businesses will depend on whether a wider contagion sets in.
Global markets tumbled and the euro fell against the US dollar yesterday to 1.2711 - its lowest since January - as Greek politicians failed to form a coalition, forcing another round of elections. Parties opposed to the bailout deal are expected to win in June, making the prospect of Greece leaving the currency bloc more real.
"What was initially a tail risk is starting to look more like a catastrophic risk that cannot be ignored," said OCBC Bank's head of treasury research and strategy, Selena Ling.
Shocks from a Greek exit are likely to spread through financial markets first, she said. "Stock markets may reel from the shock, money markets may freeze up and short-term interest rates may spike should there be widespread panic over eurozone counterparty risk and mark-to-market losses etc."
Investment technology provider SunGard's latest simulations show that in the mildest break-up scenario where only Greece exits, eurozone equities and Asia-Pacific equities could both fall 5 per cent.
Singapore's real economy would feel the hit after. Bank of America Merrill Lynch economist Chua Hak Bin thinks that the risks of 2012 GDP growth coming in at the low end of the government's 1 to 3 per cent forecast are now higher. A deepening of Europe's debt woes may stall Singapore's growth recovery, he said.
A likely drop in the euro, while making imports from Europe cheaper, also makes Singapore's exports more expensive to Europeans. This would exacerbate already weakened export demand from a region facing recession, said Kelvin Tay, chief investment strategist of UBS Wealth Management Singapore.
The EU27, which includes UK, remains Singapore's largest non-oil domestic exports (NODX) market. It accounted for about 15 per cent of all NODX last year. Estimates have also shown that EU's share of Singapore's NODX rises above 17 per cent, once indirect demand for Singapore's exports to China that are re-exported to EU are accounted for.
Even though the BT-UniSIM Business Climate survey showed that firms do not expect Europe's economic performance to sway sales significantly this year, latest developments have had an impact on "already fragile" sentiment, said Singapore Business Federation chief executive Ho Meng Kit.
"Singapore companies are both directly and indirectly exposed to countries in the eurozone and the current impasse will have a bearing on businesses. These developments in Europe will introduce even more uncertainty to the global economic situation."
What ought to worry businesses here is if Greece's exit leads to a string of other vulnerable economies leaving the eurozone too. Though Greece may be "a small potato in the overall picture", its exit could set a dangerous precedent, said UBS's Mr Tay.
Peripheral eurozone economies, such as Portugal, Spain and Italy, if seen to follow Greece out, might then also face bank runs as their depositors flee. "In our view, a financial crisis is unavoidable, if Greece exits from the eurozone," said Mr Tay.
SunGard's results show that if both Greece and Portugal exit, the fall would be a sharper 15 per cent for eurozone equities and 10 per cent for Asia-Pacific equities. But a worst case scenario in which the currency bloc crumbles could see eurozone equities dive 40 per cent and Asia-Pacific equities, 30 per cent.
Views are divided on whether there will be contagion. Not everyone thinks so. SBF's Mr Ho thinks it unlikely that Greece's exit will trigger a breakup of the eurozone, though that is a situation businesses are wary of.
Citigroup economist Kit Wei Zheng thinks the cost of contagion will be too great for European policymakers not to take decisive action to limit the spread.
That is only possible if the European Central Bank, European Union and International Monetary Fund "pave the way for Greece to exit the eurozone but effectively pledge to fund it for a few more years and ringfences the other peripheral economies", Ms Ling said.
Without clarity over whether the euro as a currency will continue to exist and function if Greece exits, businesses may face settlement risks for transactions denominated in euros.
Companies such as The Ascott Ltd which book both revenues and costs in local currencies for operations in Europe will have it easier. "We do not see that there will be a major impact on Ascott should there be a change in the operating currency from euro to the respective countries' currencies," said Ascott managing director for Europe Tan Choon Kwang.
And SBF's Mr Ho sees "silver linings". "Emerging markets in Asia are still doing well and the EU-Singapore Free Trade Agreement which is in the final stages of negotiation, should provide our companies with new opportunities within the eurozone and EU when it comes to fruition," he said. That is, if the crisis doesn't get out of hand.