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May 29, 2012, 08.17 AM IST
Germany's stance on European issues in June is going to be critical to the world economy. the bets are more in favor of a solution which is to kick the can, open up the flood gates of Eurobonds, print money and Germany playing a significant role in solving the problem.
Speaking at the Kotak Mahindra BFSI Conference 2012 today, Uday Kotak ruled out the possibility of a Greexit (newly coined word) and believes at some level Germany will give in to save the Eurozone from breaking up. He says the bets are more in favor of a solution which is to kick the can, open up the flood gates of Eurobonds, print money and Germany paying the price as a significant player for solving the problem of Greek, Spain, Ireland, Italy and Portugal.
"My instinct tells me that the political class in the world today is not ready to take immediate pain and there could be a big capitulation by ECB or Germany and France. They may do a little now and postpone the problem. If it’s the first, I think we will see a significant rally in all asset classes and if it is a second, we’ll move on between risk on and risk off for a long period of time."
Later, speaking exclusively to CNBC-TV18, Kotak spoke at length on issues relating to India's fiscal deficit, depreciating rupee and the role of RBI.
Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee. Also watch the accompanying videos.
Q: What is the global outcome in June? How it affects us? Do you think this time around we’ll be able to avert a global crisis since global politicians and policy makers are going into this problem with their eyes open, unlike in 2008?
A: I think the last person standing in the world today is Angela Merkel of Germany. She is the one who is still committed to fiscal discipline. I think the rest of the world is moving more in the direction of looser fiscal and monetary policy including printing more money.
The world is a little different because it has gone through the Lehman experience in 2008 and therefore the systemic outcomes of a Greek disaster are certainly on leaders’ minds. The key event to watch is does Germany capitulate and agree to some sort of quantitative easing (QE) or Eurobonds, a different way of printing money?
Q: So far, she has appeared quite inflexible. And that has got the market worried in the near-term. But do you think it’s a matter of time before she gives in and says, ‘I cannot afford a Greexit led financial meltdown, so much that I dislike it, I have to go along with what the market wants?’
A: Everyone is watching the Greek Elections on June 17. I think June is a very critical month for the future of Europe in many ways as September 2008 was a critical month for the world. So, watch out for June.
If there is some sort of opening up or printing of money in some form, we will see a risk on trade. If it is some half hearted measure, which is kicking the can into the future, in that case, you will continue these bouts of risk-on and risk-off. I would say the probability of a disaster is low, though not zero. These are the three situations, I would put the overall global finance in.
The most important challenge today is what is good for intended economic outcomes is leading to unintended market outcomes. India is caught on these two aspects. When you see loose monetary policy and a lot of money printing, which brings the risk on trade, you are seeing all assets go up including commodities. Therefore, that hurts India fundamentally, though you see bouts of short-term money supporting us.
If you don't see loose money while asset prices decline, which is good for India fundamentally, the market outcomes are short-term and will not make India happy. So, the domestic markets face the challenge that is between a fundamental and market outcome.
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