In an interview to CNBC-TV18, Tim Condon of ING Financial Markets gives his take on how global markets will react ahead of the European Central Bank’s (ECB) policy meeting later today and Federal Reserve chairman Ben Bernanke’s testimony before Congress on Thursday, for the latest signals on whether the central bank is going to extend its bond purchases.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: What are you looking forward to hearing from the ECB?
A: We are looking for the ECB to remain on hold today. We think eventually they will cut rates but we think that it is too soon today. More guidance from them will be something that investors will be scrutinizing but in essence we think the ECB does not want to take the pressure off of the European politicians to deliver the structural reforms that lie behind the solution to this European fiscal crisis.
Q: Yet the pressure is building up and more particularly naturally on the weaker elements, Spain going on record to say they are losing access to capital markets. Would you say even an LTRO from the ECB cannot be ruled out under such circumstances?
A: No, I think the ECB has demonstrated its commitment to preserving liquidity in the European banking system. An LTRO conditions warrant. We do expect them to come up with a third LTRO. So investor anxiety about that doesn’t seem misplaced. The worries about Spain are that somehow it is going to go the way of Greece because of an inability to obtain sufficient financing for its bank recapitalisation.
Again, the money is there, it requires that Spain bow to the IMF which is something they are deeply reluctant to do. It doesn’t look like there may have an alternative to that. The sovereign cannot come up with some money by itself, at least investors don’t believe it can and the Germans in particular are reluctant to allow the existing support funds to be directed at Spain without going through the IMF.
These problems are not conceptually difficult. Banking crises are a dime a dozen and it is financing that is something of a challenge. We shouldn’t think in our judgement it is not going to take us to the brink of an exit by Greece or anyone else in the euro zone in the near-term. It is greatly anxiety producing. This seems as a problem - where there is a will there is a way and we do think that investors would doubt that will at their peril.
Q: Going forward in the coming few days, what can we expect by way of action and how soon? What are the key events that you are watching out for?
A: I think investors should curb their enthusiasm on this. I don’t see a quick fix of any sort in the euro zone coming. It has never been the case that the euro zone politicians have come out ahead of the curve. They have always reacted, which let’s face it, that is what we want of our bureaucrats; we don’t want entrepreneurial bureaucrats spending other people’s money. The problem in this instance is it creates these near panics which we had last week and we are kind of bouncing a little bit back from that this week.
With the Fed it is the same thing. The newspapers today are talking about some breaking of the ranks and Fed considering further accommodation. I think the bar is very high unfortunately, to further accommodation. We have this ugly configuration of very tight monetary conditions in the G3. It would obviously be better for everyone were monetary conditions broadly loser in the major advanced economies but that is not the world we are living in.
So we are in a very difficult environment and slow nominal GDP growth or outright recession in the euro zone, in all of the advanced economies undertaking fiscal reforms these things are going to take a long time. It is not the end of the world for emerging markets but global growth is 3% not 5% as it was before the global financial crisis and that makes it a little bit more difficult to make money in financial markets for sure.
Q: Where do you stand on the expectations of a QE3 from the US? Will it come?
A: It takes much worse economic conditions. The last two QEs have been preceded by sharp declines in market based measures of inflation expectations were not at those levels and my thinking is unless we get there, my thinking is no QE3.