Patrick Legland of Societe Generale explains to CNBC-TV18 that with ECB support and the banking crisis receding, investors are withdrawing funds from safe havens such as the German Bund and the French OAT to invest in peripheral European economies such as Spain, Portugal and Greece.
Below is an edited transcript of the analysis on CNBC-TV18
Q: What is your opinion on the euro-dollar which has surprised the markets with its strength despite the crisis in Greece being unresolved? Do you think Greece has gone off the markets' radar? Why are periphery yields going down despite Spain not asking for help?
A: Yes, I think you are absolutely right. Investors consider that at this stage Greece is becoming almost a secondary issue. Across Europe, budget deficit has been massively declining. To put it in context, at the end of 2002 government deficit in Europe was between the region of 3.5-4 percent which in comparison with the US is not so bad and that’s why the EU remains a relatively strong competitor to the US. The European economy has also been holding up relatively well, though there will be a mild recession.
Q: Is not the market a bit sanguine, a bit too confident that Greece will get its 31 billion euros next week? Are you quite sure that will happen? Should not some leeway be given for a potential postponement or something coming unstuck?
A: With Greece, everything is possible. But certainly Spain is where investors see potential risk. A further downgrade on France due to the economic slowdown also holds obvious risk, but global investors are asking less and less questions on Greece.
Q: PMI data from China and the euro zone was released on Thursday and there are indications that it is bottoming out. Do you think it might have hit the bottom and will now begin to move upwards? With optimism on China restocking again rub off on the euro zone and the globe?
A: From an economic standpoint, I am not particularly optimistic on Europe. The PMI data has indicated two technical effects. First, Europe will start having low comparison basis and by technical comparison, PMI is showing an improvement. Second, peripheral Europe has begun to improve competitiveness by reducing salaries. A combination all these factors has led to the beginning of a rebound in exports particularly for Spain, Portugal, to a lesser extent in Greece and this is has turned positive for PMI. Obviously, Germany is relatively worrying at this stage as it copes with a continuing slowdown.
Q: Why is it that peripheral country yields like Spain are still showing a tendency to fall?
A: We should not forget that investors at the end of the day are looking for yields. They parked their funds on the German Bund or the French OAT just as a safe haven. But when they see that on the one side the ECB supporting Spain and on the other, some resolutions to the Spanish bank crisis, which to a certain extent, has certainly disappeared. This is why investors are switching from Bunds particularly into more peripheral countries such as Spain, Portugal, and Greece.