In his analysis of the economic situation in Europe with the Greek elections around the corner, Bruno Verstrate, CEO, Lakefield Partners explains to CNBC-TV18 that the markets are keen on the emergence of an element of certitude and will rally even if Greece exits the Euro.
However, he adds that the ECB and Germany will do all they can to forestall an exit. The real worry for the Europe is, as Bruno points out, is in preventing and controlling the economic contagion in Italy and Spain.
Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: What do you attribute this bonhomie in the market to? Is it largely due to the covering of short positions ahead of Greek elections or is it some comfort from the behaviour of central banks?
A: I think at this stage the market seems to be convinced that the sovereign and the banking problems will be dealt with separately. So far, it has been observed that the banking problem added fuel to the sovereign fire.
Now, the market does expect the central banks to take over and initiate a sort of coordinated global stimulus. And I think this is something that is putting the risk back in. The elections in Greece are still there but the political pressure has never been higher than it is today.
Q: If the event were to pan out against market expectation, do you think all this talk of global easing and some central bankers affirming that losses could be limited would aid in being able to predict the downside?
A: I think most of it is in the price. There might even be a relief, even in the worse case scenario, if there is certitude about what would happen with Greece. The euro might go up, and the markets might take a relief on it. Economically, the impact is not that relevant, but the biggest worry is whether the contagion to Spain and Italy can be held under control.
The markets may turn lower, but the ECB and Germany cannot afford to let Spain or Italy go. And everything will be done to avoid such a scenario. I do believe that even in that scenario there would be a relief rally.
Q: Earlier, ECB chief Draghi exhorted governments to think of more of the Union especially in the labour markets. He also spoke about long-term refinancing operations (LTRO) though he did not indicate anything fresh. What were your key takeaways from that? Would an LTRO be expected now?
A: I think it is as far as the ECB wants to go. I think the first two LTROs proved that there was no direct economic impact. My takeaway is that Draghi is increasing the pressure on politicians stating that he may not be able look on passively for long and that in the end, he has a responsibility as well.
I believe that is what the markets took away from Draghi’s speech. He might be threatening the politicians as much as he can, but in the end they will be the last backstop in Europe.
Q: Yesterday, there was talk about the secret polls in Greece which indicate that the New Democracy party is in the lead. Do you think New Democracy will get a majority of the votes?
A: It is very difficult. We all know how political opinion polls can turn out in reality. It is a very close call, but it will be difficult to form a Left Wing coalition that would be good for the markets.
If that is not the case, I do believe that it will be the more moderate coalition to be a realistic outcome at this stage. In any eventuality, the majority of the Greeks want to stay within the euro.
Of course, it is the consequences that they are afraid of. It is interesting to note that the Greek interest payments are so high on deficit on demands by the ECB and other European countries. So if more moderate parties are elected, the interest rate will lowered.
Q: What is the timeline when do expecting the results of the Greek poll to come in?
A: I think it will come in on midnight Sunday. So the markets will be able to react from the first exit polls on Monday morning. Of course if any action needs to be taken before the markets open by the central banks, I think they will have time to do that though it may not be a lot. I think the central banks’ contingency plans are in place and the exit polls will definitely determine what action needs to be taken.
However, I do not expect a forced exit of Greece even in the worst case on Monday. It will be an evolution rather than a clear pulling-the-plug. But I think the central banks and banks around the world are prepared for this event. It is a bit like the Y2K problem. Everyone is prepared for something, but they don’t know what is going to hit them.