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How quickly things change on the global stage, one can judge from the Greek Crisis. On June 22 at the Euro summit, the leftist Greek government presented a proposal that would have broken the five-month deadlock between Greece and its lenders. All indications were that European movers and shakers and the IMF were almost ready to agree to a new proposal. However, as it happens when the master knows that the slave is desperate they ask for do more. The IMF and the Germans asked the Greek government to cut and take additional anti-social measures in the nations social security and pension system.
Then on June 25, the Greek government was asked to eliminate the benefit for low-income pensioners completely by 2017 among other austerity measures. The proposal which Greeks presented in the first meeting was already too much for the socialist government to bear that came on the platform of anti-austerity.
These new demands were the last nail in the coffin and the Greek Prime Minister Alexis Tsipras surprised the world by calling a referendum on the bailout deal. However, since the bailout programme is expiring on June 30, and this referendum will happen after the deadline, the referendum is more about asking Greeks whether their country should stay in Eurozone or not. Now, Greece has two options one is to go ahead vote yes in the referendum and accept the demands of the creditors and get another lifeline of funds to sustain its operations. If this were to happen which is likely given the huge stake France and Germany have in terms of debt and the future of European Union at large, all worries would go away till the next deadline. However, there is also an odd possibility that Greece defaults on its obligations and Grexit would actually happen. It could certainly be able to collapse the financial system in Europe given its significant exposure to Greek debts. Also, it might trigger a domino effect and other weak economies like Spain would come under the crisis and collapse.
That will certainly be a major event since Spain is much larger than Greece, and it would put greater pressure on the Unions GDP. Nevertheless, if Grexit happened and there is a need to write-off the debt, this would certainly put pressure on France and Germany, which are the largest lenders to Greece. Also, they are the largest exporters in Eurozone as well, and so this would hurt the exports to the European Union, and therefore their economy at large. The overall impact on Pakistani economy of all this, however, would be somewhat mixed. First, Europe is in much better position today than it was in 2012 to handle the immediate fallout from a Greek exit. Economists largely believe that this time around the risk is largely being reduced, and the markets have already priced in the situation. Yes, there would certainly be a panic in global stock markets, and an immediate sell off might happen in the case of Grexit or default. That may trickle down to KSE also, but eventually markets should recover soon. With regards to remittances, inflow from Europe was only 2 percent in 11MFY15, which means the impact on Pakistani economy via remittances would be none or negligible. Likewise, net FDI inflows from Europe have also been very dim in recent years - 6 percent of total in 11MFY15 - and so that there will hardly be any impact on that front. In terms of trade, the European Union is the largest trading partner of Pakistan taking 21.2 percent of Pakistan's total exports, of which trade between Greece and Pakistan meagerly averages around $73 million. In the case of Greek default, the European Central Bank (ECB) will certainly put limits to prevent Euro contagion from spreading to the rest of the European periphery. This action by ECB can be expected to further weaken the Euro against the US dollar, and in turn impact Pakistans trade balance with the Union. However, it is not clear how much and how hard it will hit the economy. Sources from the field have told BR Research that many Pakistani exporters are already trading in USD, and so they argue that the impact of this crisis would be minimal if the crisis does not spill over to Spain, Italy and other troubled economies of the European Union.
However, Shaukat Ellahi Shaikh, Managing Director of Nagina Group, disagrees with that notion. He argues that no matter what type of the settlement currency has been used in the transaction, the end user is still using Euro. So if Euro is weak, it will cost him more to buy Pakistani exports, which means Pakistani exports will likely suffer. In the end, things are not very clear at the moment and Pakistan has to use wait and see policy. But one thing is crystal clear regardless of whether Grexit triggers domino effect or not, Pakistan must start diversifying its export products as well as its markets, and fast.

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