Feb 27, 2013 08:36 AM IST | Source: CNBC-TV18

Italy may exit Euro on unfavourable coalition: Macquarie

Richard Gibbs of Macquarie Securities, says that the markets are worried about the Italian political environment and what kind of coalition that will emerge and if the upcoming coalition will be stable or not.

Richard Gibbs of Macquarie Securities, says that the markets are worried about the Italian political environment, the kind of coalition that will emerge and if the upcoming coalition will be stable or not. If the coalition is messy like anti Euro, then there is a possibility that we may see Italy exiting the Euro zone. This also indicates a messy version of risk appetite around the world. 

Below is the edited transcript of his interview to CNBC-TV18.

Q: How are you reading Italian elections and what would be the continued impact on the markets on the back of the elections?

A: It can always be messy in Italy as their politics has been in the past. The question is whether this transpires to be messy but pro Euro or messy and anti Euro. The markets are really worried about this and what kind of coalition will emerge and if that is a stable coalition in that respect.

Q: Do you think it can go to the extent of euro exit?

A: It could go to the extent of Euro exit if we get a messy coalition which is anti Euro. This also means a messy version of risk appetite around the world. I am seeing a combination of political factors coming into play. With sequestration across the US, which will begun on March 1, will result in expenditure cuts of USD 1.2 trillion over next decade.

Q: So, with now the sequestering debate in the fore and some inevitable cuts that will come even if not all of them and the growth in the US will also slowdown. Have the markets factored that in. So, they are balking at 1500 mark?

A: The markets were factoring in an upside risk to growth on the macro side in the US and that is pushing the multiples as seen in most markets including India. Even if there is some kind of brokered outcome with the sequestration, we are starting to see some immediate impact particularly on the long-term unemployment in the United States where there will be fairly sizable intrinsic reduction in the benefits that they receive.     

Q: How has been the fund flow movement over the last few days because off late, we have started hearing negative news flow on the global side, premature ending of QE, some disappointing economic data and now the latest Italian news. In all this period in the past two weeks when we are getting negative news flow, how has the fund flow behaved?

A: Ironically, it has gone back in favour of the US dollar. It is growing back as a safe haven. We are seeing that money going back initially into the cash positions in the US dollar. Also, I think ironically it will find its way back in fixed income as well even at these still quite low yields. The last week have communicated that it may end QE sooner rather than later.

Q: How do you look at this risk off that appears to have set in? Will it last as long as the risk on last year?

A: It could quite possibly. It depends really how the politics play out. Moody's downgrade of the United Kingdom is the third factor that we did not mention, things also turn out from here and a much weaker pound. So that’s in the mix as well and that's refocused attention on sovereign indebtedness and credit worthiness.

So I think it could drag on for longer in terms of risk aversion that we are seeing. So coming back from the Middle East, we have concluded that one would still want to have a fair weight of your assets in cash at this point in time.  

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