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May 25, 2012, 08.09 AM IST
Losses across European equities continued on Thursday following weaker-than-expected German IFO report. In an interview with CNBC-TV18, Sarah Hewin of Standard Chartered said that there was some confusion in the surveys about activity in Germany.
Hewin is of the opinion that it is still uncertain whether Greece will exit the euro zone. "Markets equally are not fully positioned in the event that they do leave. For now, I think markets are reflecting just the sheer scare of the uncertainty around Greece’s future. More broadly, what that might mean for the euro and the European economy," she said.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: Yesterday, there were deep cuts in Europe but some of the risk assets like oil, gold and US markets made an intraday recovery. We aren't seeing a lot of follow-up in the European markets today. Is there any negative news flow that we are missing here?
A: We have seen the euro take a big hit this morning. It is now trading at 1.25-1.22 against the dollar. This is because we have had some bad news on the purchasing manager's indices. We just had a weaker than expected German IFO report. This is significant because the IFO index, until today, has been diverging from the purchasing managers indices.
It was a bit of confusion really as to what the surveys were actually saying about activity in Germany. Now, there seems to be more clarity that Germany is also starting to struggle in the face of the ongoing crisis.
Q: The euro is slipping down to record lows to 1.2518. But considering that the PMI composite data is weak, what do you think that the ECB (European Central Bank) possibly could do at this point in time? On one hand, we have Greece which is a problem and the Eurobonds are now under consideration but we also have growth which is slackening quite a bit?
A: Yes, we think that the ECB will cut interest rates over the next couple of months. This will be in response to what's happening in the real economy. I don't think they will be particularly concerned about the euro and indeed of course a weak euro will help Europe's exporters. So, there are advantages to having a weaker euro.
Q: There has been this game of brinkmanship; the leaders also perhaps making contingency plans in case Greece were to exit. Greece, of course, has stood by what Syriza has to say. Do you think it could continue to be a chicken-and-egg game till the elections? What are the expectations from Greece at this point, do you think world markets are beginning to factor in a Greek exit and there wouldn’t be much downside if it were to happen?
A: Certainly, there is a lot more talk about the Greek exit. It is perhaps not too much of a surprise if it happens. Having said that, markets are not fully positioned for this event. Of course we don't know, we need to wait and see what happens with the elections. The elections in Greece will take place on 17 June. There is still a lot of uncertainty, there is every reason for Greece to remain in the euro.
I think that it is not a conclusion they will leave and markets equally are not fully positioned in the event that they do leave. For now, I think markets are reflecting just the sheer scare of the uncertainty around Greece's future. More broadly, what that might mean for the euro and the European economy.
Q: The Greece situation is hypothetically solved at some point in time whether it stays in the eurozone or not, the next problem, which could possibly emerge in your mind would then be Spain and then possibly Italy. Do you see this eurozone crisis to be just prolonged and Greece being one of the events that takes place in a longer scheme of events?
A: There are a lot of different strains and the real concern is that if Greece were to leave, there would be contingent to other countries. Spain is particularly in the limelight at the moment because of its wide deficit and its ongoing problems in the banking sector. But there are other countries that would also be caught up in any post exit environment - Italy, Ireland, Portugal. Italy of course will be the big one.
Q: Finally, there was a lot of talk about contingency plans yesterday. Do you think it could involve in some form of easing by the ECB perhaps in an LTRO or do you think the ECB will wait for the event to occur before it takes that kind of a step?
A: I think that is pragmatic and now according to what is required at the time. So another LTRO would come about if there was particularly strong strength in the euro area. As I said, on the exchange rate movement is not going to drive ECB policy at all. It will be much more a case if banks start to trouble to find funding. But there is already substantial liquidity out there. I think that the ECB, at the same time, wouldn't embark on another LTRO unless the situation absolutely demanded it.
May 22 2013, 11:25
- in FII View
May 22 2013, 10:44
- in Economy