ECONOMY -GULF FEELS THE EURO EFFECT.

Summary: If Greece leaves the Euro the impact will be indirect but significant for the Gulf, say experts. TEXT BY NEIL CHURCHILL 

Last month greece went to the polls for a second time, its Euro future hanging in the balance. Spain finally threw in the towel and requested a long-awaited bailout. They received $126 billion. Shortly afterwards Greece voted into power the pro-bailout New Democracy party; the two developments offering the thinnest of lights at the end of a dreary, debt-laden tunnel.

But all is still far from well in the Eurozone. Will those bailouts be enough to save the ailing European economies and their debt-laden peers from falling by the wayside? Will the Euro survive if one of the weaker limbs is cut off? No one knows for sure. This is a unique situation without precedent. One pertinent question here in the Gulf is whatever happens, will business in the region be affected?

Should a 'Grexit' occur, some local economists believe it will rattle confidence in the Gulf economy, lowering oil prices and impacting the local stock markets. Others believe it will be far worse than that.

"With the Eurozone we're not talking about a single event, it'll go on and on for at least a decade or more," says Dr Yuwa Hedrick-Wong, global economic advisor to MasterCard. "We are talking about a crisis converting into a disaster. The global outlook will continue to be very volatile."

M.R. Raghu, senior vice president at Kuwait Financial Centre, believes the impact would be indirect but the collateral damage would still be significant enough to impact local stock markets, investor confidence and trade links.

"There is no direct relationship between Greece and the Gulf from a trade perspective so the direct impact on the Gulf will probably be miniscule. But the collateral damage will be very significant.

"The exit of Greece from the Eurozone will rattle confidence in the currency and stock markets and impact global growth. The knock-on effect will have an impact on local economies and will lower oil prices throughout the region," said Raghu.

"Local stock markets will also be affected as they increasingly react to world events. So if the global markets react sharply to the news, which is what we're already seeing now, then weaknesses in local markets may appear.

"Things are evolving by the minute with the Greece situation," Raghu said. "The possibility of an exit is no longer talked about as a rumour but is now being valued as a real option. It's very worrying; it will have a contagion effect."

Though the possibility of the Eurozone contagion is possible, one expert believes the GCC's close trade with Asia will be the region's saving grace.

"Should there be any Greek event, the main channel of contagion to the real economy will be through trade/exports," said Philippe Dauba-Pantanacce, senior economist at Standard Chartered Bank.

"But Asia is now the GCC's main export market, while the EU represents only seven per cent. So the channel of contagion will be indirect. A collapse in Asian demand, coupled with already muted growth in the West, would certainly translate into lower oil prices and output.

"One of the most severe effects is likely to come through financing channels. Tight credit has been prevalent in the region in the past few years, and a more acute shortage of bank liquidity would turn into even tighter credit, both for households and for corporates and sovereigns wanting to tap debt instruments.

"It is important to also note that the traditional role of European banks had diminished already in recent years, to the benefit of other sources of financing, including banking from emerging Asian countries."

At the time of writing the Gulf's economies and markets continue to watch and wait nervously.

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