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Jul 12, 2012, 08.23 AM IST | Source: CNBC-TV18

Low on reforms EU Summit may hit Spain: HSBC

Madhur Jha, global economist, HSBC, says that initially, there was lot of optimism that some concrete and implementable measures would come out of the summit but as the time progressed and Ms Merkel in particular has categorically suggested that it is difficult to expect real solution which could be implemented immediately.

Madhur Jha

Global Economist, HSBC Group

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Madhur Jha, global economist, HSBC, says that initially, there was lot of optimism that some concrete and implementable measures would come out of the summit but as the time progressed and Merkel, in particular, has categorically suggested that it is difficult to expect real solution which could be implemented immediately.

The good outcome of the summit is that our expectations are very low. The best we can hope is a long-term road map to suggest how they would get to a banking union, fiscal union and a promise that they will deliver on the detail a little bit later on. The outcome of the summit may have negative implications on Spain as the markets want immediate and implementable action right now.

Below is the edited transcript of her interview to CNBC-TV18. Also watch the accompanying video.

Q: Why are the markets losing their nerve even after fair data from the US?

A: Initially, there was lot of optimism that some concrete and implementable measures would come out of the summit but as the time progressed and Ms Merkel in particular has categorically suggested that it is difficult to expect real solution which could be implemented immediately. One can see markets pare back in Europe and now the emerging markets are also catching the stream.

Q: With no concrete outcome from the EU Summit, do you think time is running out for Spain and by when do you expect a full borne crisis in Spain if additional measures are not taken?

A: The good outcome of the summit is that our expectations are very low. The best we can hope is a long-term road map to suggest how they would get to a banking union, fiscal union and a promise that they will deliver on the detail a little bit later on.

The outcome of the summit will have some negative implications on Spain as the markets want immediate and implementable action right now.

Market investors will continue to see Spain as a next potential target for full scale sovereign bailout and because of these the bond yields will continue to rise. ECB is the only option left to provide some support to the Spanish banking sector and the sovereign either through a rate cut or renewed buying in the secondary market, to bring down bond yields. But clearly Spain will remained focused and a target for surrounding concern for a full scale bailout.

Q: How much rate cut do you expect from the ECB meet on July 5?

A: Inflation is coming down as oil prices is reducing so the constraints on the ECB have also gone away so a 25 bps cut looks in sight and thereafter depending on the scale of the volatility and market reaction they might undertake even some extraordinary measures like buying SMP or an LTRO looks unlikely.

Q: How will the markets react on Monday if we get a roadmap for banking compact, some deposit insurance or heightened deposit insurance? Will it be seen as a major disappointment or will it be catastrophic enough for the markets to start receding more and then bring the ECB in?

A: We are not looking for any deposit guarantee scheme at this point of time. We are expecting a very long term and vague roadmap from this summit. I think in this summit we will get some promises to try and achieve something concrete in upcoming meetings in September and December, if we get anything more than that then the markets will be happy.

The positions of Germany and France are so different in terms of whether they want euro bonds or not, whether there should be a loss of sovereignty or not there is no agreement on that so we will not get any concrete decision.

READ MORE ON  HSBC, EU Summit, markets, bailout, economy

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