May 10, 2012, 10.43 PM IST
Trevor Williams, chief economist, Lloyds TSB says that Greece crisis has been going on for last 2.5 years and Greece has already received three bailouts.
“I don’t think that Europe and the European Union economies in particular are in recession, the US is expanding much more strongly than they are. Clearly they are in recession and the US is expanding,” said Williams.
Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.
Q: As far as CAC is concerned, indices are in subdued terrain but DAX is holding up in green? Do you see near term losses before even the week runs out?
A: The market volatility is understandable from the potential destruction from Greece and worries about contagion effects that could have on other countries. The markets are in term with the developments.
Q: Is the market preparing for Greek exit? If it plays out how does it play out? Is it like a post Lehman moment?
A: Firstly, the markets are prepared. Secondly, the effects will not be catastrophic because the uncertainty that Greece is in or out is causing the problem. A decision will clear things up, I think Greece will leave.
The markets are expecting Greece’s exist. I don't think it will be a Lehman moment at all. I think Lehman was totally unexpected; it was involved in millions of counter party transactions. Greece is not in that kind of position.
Q: Do you think the euro will strengthen if Greece were to exit the euro zone or do you think the exit of Greece could at least cause near term volatility?
A: The volatility is already being priced in. I don't think its actually leaving. The event and the fact of it leaving, I think there will be a relief rally. I am not so sure for the currency initially, countries believe they can’t sustain membership that are weak, it will clearly strengthen the currency because there will be stronger body without them.
In the short term, worries about who is next may cause the currency to remain volatile. But equity markets and bond markets may rally as and when some of the countries that look like they are going to exit actually do so.
Q: The socialist party will be given a chance to form a coalition today, but if it fails to do so we will be staring at a re-election. Do you think the Leftist’s would come to power with their stand against austerity?
A: This is all part of the story about why they will leave. I don't think that any of the smaller fringe parties will be able to stick to the agreement, enact the austerity measures that have already been agreed by Greece as a country. They will renegotiate these agreements and that will force their partners to say, if you can't meet the agreements, you are not going to get the money, if they don't get they money, they are going to default on their loans, if they default on their loans, then there will be no option for them but to exit the euro.
Q: Do you see more downside for Greek bonds? French banks which have a greater exposure to Greek liabilities, do you see more downsides and stress related to banking sector?
A: Yes, there will be stress and the Greece crisis has been going on for last 2.5 years and Greece has already received three bailouts. Everyone who has exposure to Greece has covered the debt, has written down loans and has effectively written off those debts. I don’t think that it will create any problems that people seem to imagine that it will.
Q: The euro has held itself bravely inspite of a massive event like probably Greece getting closer to exit. We have seen it dip a little below its traditional range of 1.3-1.32 which it has held for the past 12-15 weeks. Will there be more downside?
A: Currency isn’t just driven by one event. It’s driven by the position that the economy is in, yield structure relative to other countries, capital flows and so forth. Strictly on the political issue, it may well stay stronger than it would otherwise and we are seeing that in the currency being as strong as it is given all the political eruptions it’s only moved to the bottom of the recent trading range. However, I don’t think that Europe and the European Union economies in particular are in recession, the US is expanding much more strongly than they are. Clearly they are in recession and the US is expanding.
For me it support for the US dollar versus the euro and I would expect the euro to weaken on macro economic fundamentals and that will have nothing to do with the politics of the situation for the euro zone economies themselves.
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