May 09, 2012 06:40 PM IST | Source: CNBC-TV18

Have faith Europe's political elite: Rabobank

Rabobank's Adrian Foster portends a disasterous scenario for Greece if the political parties step away from austerity, in his analysis on CNBC-TV18. He is confident of France‘s adherence to austerity with the course of events in the Netherlands providing adequate evidence on the importance of the austerity measures

Rabobank's Adrian Foster portends a disasterous scenario for Greece if the political parties step away from austerity, in his analysis on CNBC-TV18. He is confident of France's adherence to austerity with the course of events in the Netherlands providing adequate evidence on the importance of the austerity measures.

Foster reposes faith in Europe's political elite to plot a rational course that will lead the region out of the economic crisis. He asks investors to take positions keeping in mind the likelihood of the absence of standard trends. 

Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: What exactly would you watch out for on Greece now? Are you still hopeful that the politics in the country will turn around to accept the conditions laid down?

A: It's only domestic political machinations that are dominating the debate within Greece with a lot of behind-the-scenes power play by various parties. The new democracy party, which bagged the largest number of seats in the last election, is unable to form a governing coalition. The party had three days to negotiate and the leader gave up in six hours.

The right to form government has now passed to the second party in the parliament which is in the midst of a three-day negotiating period. Judging the competing interests amongst the different political parties makes it highly unlikely that any functioning coalition will emerge out of the current discussion.

The president then has the role of brokering a government, but that's unlikely too and the conclusion that the country will be back to the polls in June is most likely.

Q: So if country goes to the polls again in June, will the situation actually improve? How will events pan out till June in terms of debt repayment and austerity plans?

A: The worst possible scenario is that a group of parties could get together and stubbornly deny the whole austerity program that the European IMF troika has put in place.

That's a very highly improbable  outcome because in reality the Greek government still runs on a budget deficit. Their government revenues within Greece do not pay for the business of government, much less for the payment of interest.


So if aid from the European IMF troika stalls, Greece will run out of cash by the middle of July. If at that point the government can’t pay teachers, policemen and firemen, then that’s disaster that’s staring us in the face.

Greece is in for a very dangerous scenario and the new elections in June will have to come up with a more rational set of politicians in positions of power.

Q: The market seems to sense that with Greece putting a drag on Europe. A likely endgame is Greece exiting from the euro. What do you think the outcome will be?

A: It is a plausible scenario. But looking at the current make-up of the parliament, Greece’s exit is unlikely as there will be a coalition with sufficient seats to change government policy.

So there's no likelihood of that in the next month, because firm political decisions need longer timeframes. The country will go back to a vote and the people will speak again.

If indeed a similar sort of make-up parliament were to turn out of that election, with some of the more extreme parties holding the sufficient seats to drive Greek policy, they could indeed decide that pro-European austerity measures are not appropriate and that’s when it becomes very, very dangerous.

I don't think it's the same systemic imports through the rest of Europe as it used to be. European banks have written down a lot of Greek holdings and the ECB liquidity provisions have added quite a bit of insulation there.

So, I don't think it's of such systemic importance for Europe overall. But it is of critical importance for Greece, because if they opt out of austerity, they then essentially opt out of the Eurozone and I think thE economy would really be in a difficult place if that happens.

Q: The other problem area of course is France which presents graver concerns as compared to Greece whose exit from the European Union has a high probability strengthening the euro. What do you think of France at this point?

A: France presents a very interesting situation. Of course, France very much is the collar of Europe and its leader of policy direction. France is in electioneering mode with parliamentary elections scheduled in June.

And only after those elections will we know the actual make-up of the parliament. At that point, the new president will be in a position to push through a policy agenda if friendly parties hold power within the parliament.

And the French president needs only to look across the border to the Netherlands which had difficulty with the austerity program only a few weeks ago. Dutch bonds yield shot up quite a bit and there was a remarkable realignment of political priorities within the country and austerity ended up getting put through.

Dutch bond yields of course came much lower. The course of events in the Netherlands has shown that any shift from austerity would end up with a very dangerous scenario in their hands. I have faith in the French political elite to hold their minds and plot a more sensible course for European.

Q: What asset classes would you look at such a time?

A: I do think it's very hard to have high conviction in these markets. If you just look at the co-relation across asset classes, it is quite high in its total context. So almost regardless whatever asset you are playing in, you would be buffeted by the global risk-on, risk-off theme.

So that needs to be kept in mind. It is very hard to pick out an uncorrelated asset at the moment. I think investors should keep in mind that it is unlikely to get long, enduring trends.

So take a position, but keep that position off the table because it is unlikely that we will see standard trends. There are just too many positives rather than negatives countering each other constantly in a global market-place, to have a lot of conviction in a long term trend.

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