Impact of Greece's Loan Default on Singapore

Ms Irene Ng Phek Hoong asked the Prime Minister how will the default by Greece on its debt owed to the International Monetary Fund (IMF) impact Singapore, the region and the rest of the global economy and whether there are lessons to be drawn from this crisis which sees Greece becoming the first developed country to default on an IMF debt.

Mdm Speaker, I am taking this question on behalf of the Deputy Prime Minister

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and the Chairman of the Monetary Authority of Singapore (MAS).

The direct impact of the crisis in Greece should not be significant. While it adds uncertainty in the European economic recovery, the European Central Bank and the European Union will likely take the steps necessary to safeguard the Eurozone financial system.

The direct impact of Greece on Singapore is also small. Greece accounts for just under 0.2% of our total trade and 0.1% of banking system assets. So, Singapore's financial systems continue to function in an orderly fashion.

Nevertheless, the situation could unravel. If Greece exits the Eurozone, now or later, it could trigger a broader loss of investor confidence in European integration. There could also be knock-on effects on the rest of the world. Overall, while there is no reason for alarm, we are closely monitoring developments in Greece and the Eurozone.

Ms Irene Ng also asked about Greece and the IMF. When Greece missed a US$1.7 billion repayment to the IMF on 30 June this year, the Fund declared Greece to be in arrears. When a member country misses a payment to the IMF, the IMF continues to work with that member to help it clear its arrears. This has been the case in previous instances of arrears. It is also pertinent that the IMF has preferred creditor status, which means that loans granted by the IMF to a member must be repaid ahead of all other creditors.

The IMF has the scope to take a series of progressively stronger measures against a member in arrears. As an immediate step, the IMF will not permit the member further access to IMF resources. Where the arrears persist, the IMF could initiate procedures to withdraw that country's membership in the Fund and realise the loss. So far, no country has had to face what is, in effect, expulsion from the IMF due to persistent arrears and no losses have been realised on IMF loans.

Greece's debts owing to the IMF are significant. However, the IMF has sizeable reserves that it can use to protect its members and lenders, should any loss arising from its loans to Greece eventually be realised. When member countries contribute resources to the IMF, our financial exposure is to the IMF and not the countries that the IMF lends to. The IMF, with the advantage it has from its preferred creditor status, has, in turn, always repaid its own creditors. Neither has the IMF ever had to use members' capital funds in the IMF to cover losses. On 1 July this year, the IMF reaffirmed that member countries' claims on the IMF are fully secured and that it will continue to meet its obligations to its members and lenders.

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Singapore has, therefore, not suffered any financial impact arising from Greece missing its repayment to the IMF. To reiterate, this is because, when Singapore, as a member of IMF, contributes to its resources, our financial exposure is to the IMF and not the countries that the IMF lends to. I should also mention that Singapore's loan commitment under the IMF's 2012 Borrowing Arrangements have not been activated, as the IMF has sufficient financial resources for its current lending programmes.

Ms Ng also asked about lessons to be drawn from this crisis and there are, indeed lessons, every country can draw from the Greek crisis. There is much reflection within Europe on the incomplete design of the Euro project and what further reforms are necessary in the Eurozone. However, there are also more fundamental lessons coming out of the problems in Greece, problems that some other countries share from time to time. To be brief, I will just highlight two lessons.

First, living within our means and ensuring that budget policies are sustainable. This means avoiding populist spending promises or benefits that can only be financed by accumulating debts indefinitely.

Second, avoiding a prolonged loss of competitiveness. Greece saw growth in wages and benefits that was much higher than productivity increases and a severe loss of its economic competitiveness, including against its Eurozone partners like Germany. This has weakened its growth prospects and compounded its build-up of debt.

While the Greek crisis will have negligible direct impact on Singapore's financial markets and banks, can I ask the Minister for his assessment of the risk of contagion?

Madam, I thank the Member for the question. As I have mentioned just now, the direct impact is limited. If you look at the direct impact of the Greek crisis on the banking system in Europe – so, if we look at the first round impact within Europe itself – even that alone is also not that significant because European banks' exposures to Greece have come down significantly since the height of the crisis. The exposure was about 1.3% of the aggregate balance sheets in September 2009 and it has since come down to 0.3% as at end of 2014. In addition, the European Central Bank and the European Union are likely to take steps necessary to safeguard the Eurozone financial system.

So, if you look at the potential for the spread of the impact or the impact beyond Greece to Europe, I think there will be some impact, certainly, and the direct impact is on Europe, but that impact can be contained, given that the exposures have come down and steps are

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going to be taken.

But as I had mentioned just now, the broader contagion or the broader concern would be the unravelling of the situation because we cannot rule out the possibility of Greece exiting the Eurozone, whether now or later, and that, indeed, can have knock-on effects on investor confidence, not just in Europe, but also in the rest of the world. So, that is something that we are monitoring carefully. There is no reason for alarm now but we are aware and concerned about the risk and we are monitoring the situation carefully.