Top Greek bankers and government officials have something in common at present – optimism that the global credit crisis will leave the banks and the Greek economy unscathed. Are they right? Time will tell but the government officials seem to be right. Potential benefits may indeed turn out to be equal or bigger than the costs if the crisis does not turn into a prolonged global growth recession, something rather unlikely. The credit crunch has become a stock market crisis, undermining the real economy in the USA and threatening to spill over into the eurozone and elsewhere but this has done little to shake the belief of Greek government officials that the local economy will easily weather the crisis. According to former US Federal Reserve Chairman Alan Greenspan and other economists worldwide, the chances that the US economy will enter a recession are greater than 50 percent. This is so despite aggressive interest cuts by the Fed last week and a few months ago as well as a fiscal stimulus package worth $140-150 billion. According to the fall estimates of Eurostat, the EU’s statistical service, the -10 trillion economy will grow by 2.2 percent in 2008 from 2.6 percent in 2007 but both projections, especially the one for this year, may be revised downward to reflect the impact of the financial crisis and a likely recession in the US economy. It should be noted, however, that some people are talking about a recession in the US although what they really have in mind is called «growth recession,» that is, when gross domestic product (GDP) grows by less than the long-term trend rate for at least two consecutive quarters. At this point, all this talk has done little to shake the belief of the government that the Greek economy can grow by 4 percent next year, that is, similar to last year’s projected growth rate of 4 percent but below 2006’s growth rate of 4.2 percent. This is something some analysts are finding difficult to believe, as they point to some negative factors, meaning the higher cost of money, high oil prices, inflation, the fall on stock markets and the slowdown in global economic growth. Still, a closer look at the situation and the links between the Greek economy and the world economy presents a much more mixed picture. As a matter of fact, the positive impact of world economic and financial developments may surpass the effects of the negative consequences. There is no doubt that the direct links between the Greek and the US economy are weak. According to central bank figures, only 4 percent of total Greek exports headed to the US in 2006, compared to 45 percent going to the core 15 countries of the European Union and 26 percent to Eastern Europe. About 10 percent of Greek exports went to Arab countries and just 2 percent to China and Southeast Asia. In other words, even if the US economy falls into a recession the direct impact on Greek exports will be very small to negligible but will get bigger if the economic malaise spreads to EU countries and the rest of the world. Even so, the direct and indirect impact will be relatively low, assuming the global economy slows to an expected 3.5 percent this year from over a projected 4 percent last year. However, the negative impact of the likely economic slowdown in Greek exports can be more than offset by other factors. One of them is the likely drop in the world price of oil. It is known that a weaker global economy will have an adverse effect on the demand for oil and this in turn is likely to lead to a price fall to levels below $90 per barrel. For an oil consuming nation such as Greece, this is good news for both consumers, companies and the country’s current account deficit which is projected at a whopping 11 percent of GDP in 2007. Weaker demand is also likely to have a dampening effect on the demand for basic metals, such as copper, aluminium and others which in turn help to compress their prices and contribute to lowering inflation. The likely retreat in the world price price of oil and some industrial metals will translate into lower inflation, meaning Greek consumers and companies will see their oil bills decline this year. Greece’s headline inflation averaged 2.9 percent in 2007 from 3.2 percent in 2006. In addition, the likely economic slowdown combined with the financial crisis will have a dampening effect on short-term and long-term interest rates. To avert a severe economic slowdown, major central banks have pumped a great deal of liquidity into the markets to calm their fears of a credit crunch and the Fed has reduced sharply the official dollar rates which help set the short-term money rates. Although the European Central Bank (ECB) has signaled its intention to stay put in order to fight inflation, financial markets expect it to slash its intervention rate to 3.5 percent by the end of June from 4 percent at present. This has brought down short-term money interest rates in the US and the eurozone, although the latter are still higher than they were before the crisis started in June 2007. But expectations of slower growth and lower inflation have already brought long-term interest rates down in the government bond markets. This means a lower interest bill for governments with high public debt servicing needs such as Greece’s. Of course, other debt markets, such as the asset-backed markets where banks and corporations turn to borrowing mid-term and long-term funds, have yet to return to normalcy. As a result, many banks are willing to pay higher interest rates on deposits to attract them since they cannot easily find funding. This is good news for depositors who can earn higher interest income on their savings. On the other hand, it is bad news for new borrowers, that is households and corporations, because banks will try to pass on the increased costs of funding to them via higher spreads. Still, to the extent that money market rates are coming down, the effect will be relatively small since most households take floating-rate notes, paying the one-month or three-month Euribor rate plus a spread. Even if banks choose to increase the spreads on new loans by 0.25 percentage points, the effect will be small if money market rates continue to slide and the ECB finally gives in and slashes its intervention rate. All in all, the financial crisis and the likely slowdown of the world economy is a mixed blessing for the Greek economy. On the one hand, there is the negative impact from the lower outside demand for Greek exports. On the other, there is the beneficial effect of projected lower oil and metal prices and lower short-term and long-term interest rates. So, even if the negatives of the financial crisis turn out to be greater than the positives, the net effect on the growth of the Greek economy appears to be relatively little.