News Analysis: Impact of Greek crisis likely to be limited on Asian economies

While financial markets across the globe reacted negatively on Monday to the unexpected turn for the worse in the Greek crisis over the weekend, most analysts believed any sell-off in Asian markets will likely to be short- termed, and the expected impact of the crisis upon the Asian economies will be subdued.

The Greek crisis took a turn for the worse last weekend as no deal was reached between Athens and its European creditors on an austerity and new financial bailout package.

Instead, Greek leaders surprisingly announced a referendum to take place on July 5 to let the Greek people decide. This triggered several other sudden events: the Eurogroup decided not to extend the current bailout program after June, and the European Central Bank (ECB) opted not to increase its emergency liquidity assistance from just under 89 billion euros currently; and the Greek government also on Monday announced a bank holiday for a week as well as capital controls.

As markets have been pricing in a high probability of a deal being made in the near term until the turn of events, the outcome of the Greek crisis to date was entirely unexpected as clearly shown in the knee-jerk negative reaction in the global financial markets.

What investors and analysts are now hoping is a last-minute resumption of talks between the two sides that may lead to a deal that could lead either to the cancellation of the referendum or to a change in the recommendation of the Greek government into a "Yes " vote for this weekend referendum.

But Nomura Global Markets Research said the uncertainty over Greece will influence market sentiment at least for the week, as the outcome of the referendum is hard to predict given that the question asked is fairly oddly worded, and even what happens after a "Yes" and a "No" vote is also highly uncertain.

Nomura believed the financial market contagion fears triggered by the Greek crisis will be mostly felt in the Asian currency markets in the short term. Malaysian ringgit and Indonesian rupiah are most vulnerable and likely to under-perform given the vulnerabilities from high foreign debt ownership levels and net commodity exposure of both Malaysia and Indonesia.

In Malaysia, lower foreign exchange reserves and a likely sovereign downgrade by Fitch in coming weeks compound these concerns; while in Indonesia, the financing of the current account deficit will become even more challenging.

On the contrary, the outperforming currency amid the Greek crisis is likely to be the Chinese yuan. Nomura explained that Chinese currency will remain intact in coming months for a few reasons, including China's focus in joining International Monetary Fund's special drawing rights (SDR) basket; prudent capital flow management; signs of an improving local macro economy as reflected in the official purchasing managers' index and stabilizing property prices; and China's awareness of the increase in credit risks on foreign currency debt.

Beyond the short-term currency volatility, Nomura does not see any long-lasting market fallout similar to the 2010 to 2012 episodes of European-led financial market pressure to unfold in Asia. Benefiting from the sharp decline in oil prices over the past year, overall Asian economic fundamentals have improved, which suggest that Asia is expected to be the least exposed to financial contagion within the emerging market universe.

Capital Economics, an independent macroeconomic research firm, also argued that beyond a handful of emerging European economies, notably Bulgaria and Romania which are directly exposed to Greece via strong trade and banking sector linkages, the direct links between Greece and the rest of the emerging economies are limited.

The most vulnerable emerging economies would be those that depend heavily on external financing to fund spending and service debt. Of the major emerging economies, Malaysia is the one in Asia that looks exposed.

Assuming the problems in Greece remain contained, developments elsewhere -- notably in China -- will continue to have a greater bearing on the outlook for majority of the emerging markets in the region. Endi