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Feb 24, 2012, 05.26 PM IST | Source: CNBC-TV18

Europe has ring fenced 'Greece' for now: HSBC Private Bank

Arjuna Mahendran, the MD, Head Investment Strategy Asia, HSBC Private Bank tells CNBC-TV18, he expects the ECB to infuse 400 billion to 1 trillion euro via a second LTRO on February 29.

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Finally, global market can breathe a little easy. Eurozone finance ministers announced a second bailout program that includes new financing of 130 billion euro. According to news reports, officials have confirmed that Greece will take steps to reduce its debt from around 160% of GDP now to 121% by 2020. Final Greek haircut for bondholders will be 53.5%.

Arjuna Mahendran, the managing director, Head Investment Strategy Asia, HSBC Private Bank tells CNBC-TV18, he expects the European Central Bank (ECB) to infuse 400 billion to 1 trillion euro via a second Long Term Refinancing Operation (LTRO) on February 29.

This year, many countries are gearing up for state elections. The big election result to watch out for is the US presidential election. Regions like the Middle East are also not likely to tip the scale and watch crude prices soar. Mahendrans hunch is that crude oil prices won't go up and the reason has to do more with politics than with markets or economics.

Below is an edited transcript. Watch the accompanying video for more.

Q: What is it you hope to hear from Greece? Does it still remain as relevant as it was a couple of weeks back for global markets and the direction in which they may move?

A: Greece has gradually become less relevant over the last few weeks. It's also to do with the fact that other European countries, the troika i.e. the EU, the IMF and the ECB have effectively ring fenced Greece from having any repercussions on its neighbours in Europe if it were to default. That realisation has gained steady credence over the last few weeks to the point where now even if it were to default you wouldnt have any short-term tremors in global financial markets or even in Europe for that matter.

The broad plan as it is perceived by the markets is that the Europeans have ring fenced the Greek problem for the time being. They have kicked the can down the road hard with the LTRO infusion of liquidity, there is another installment due on February 29 between 400 billion to 1 trillion euro which will be pumped into 60 odd European banks particularly the Italian and the Spanish banks which will then reinvest that money which they borrowed from the central bank at 1% for three years.

They will reinvest that money in government bonds of their countries; thereby prevent any dispersion of Greek debt fallout on the other countries. That realisation itself has prompted the private holders of this Greek debt to come to terms with the Greek government and perhaps agree to some of these conditions so that we will actually avoid a default.

Q: How much is crude a worry according to you because of the huge spike up that we have seen?

A: My hunch is it won't and the reason has to do more with politics than with markets or economics. This time last year, we were facing a similar eventuality of crude prices surging and most critically the price of gasoline in the US exceeding USD 4 per gallon. That really is a tipping point for US consumers because that means they can spend less on other goods and services and it affects your exports etc. We are now at about USD 370 per gallon in the US.

It's very unlikely that you would see a recurrence of that event this year for several reasons. First of all you had the Arab spring which more or less started year ago and the aftermath of that has meant that some of the monarchies around the Middle East are probably quite sensitive to the issue of high oil prices, destabilising global growth and their own internal growth dynamic which would make them relatively less popular with their people etc.

Thats one reason why these countries like Saudi Arabia, Kuwait etc will probably be induced to pump more than they did last year to avert a big price surge. Western governments are also very worried and in an election in the US in particular, where President Obama would use all his powers to try and convince oil producers worldwide to see that prices dont spike. I am taking a measured guess that this is really not going to be an issue.

Q: The emerging market index is now at a 6 month high. What's your sense of which markets like India are pushing? Is there more headroom or would you be cautious now?

A: There is more headroom particularly for China and Hong Kong which are the cheapest markets on earth. When you look at the price earnings and the price to book multiples etc these markets have gone up about 10-12% on average from their lows of last year whereas they fell about 30% from the highs that we saw in early 2010. There is still much more headroom in those markets. I suspect that would also translate into the Indian market and other Asian markets in general going forward.

What's driving earnings really is the whole social networking cum wireless technology theme which is driving up the shares of all the chipmakers in Taiwan, in Korea. There is something really impressive going on there in terms of earnings and the way those shares are trading. The Chinese monetary loosening and in India as well it means there is more cash available which is going to be deployed in a broad range of risk assets in particular.

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