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Feb 14, 2012, 05.51 PM IST | Source: CNBC-TV18

May see green light from EU meet on debt swap: RBC Capital

Gustavo Bagattini, European Economist, FIC Strategy & Research, RBC Capital Markets says there are still hurdles over austerity measures in Greece which need to be overcome before the big EU meet.

Gustavo Bagattini, European Economist, RBC Capital Markets

Investor risk appetite seems to be waning after Moody’s downgraded six European nations. The ratings scare saw European shares and the euro slide. The Bank of Japan surprised markets with a further loosening of monetary policy. This is in line with other major central banks’ move towards policy easing.

The eurozone finance ministers will meet tomorrow to discuss Greece getting its 130 billion euro bailout. Gustavo Bagattini, European Economist, FIC Strategy & Research, RBC Capital Markets says there are still hurdles which need to be overcome before the EU meeting.

Bagattini says, “What we may see is at least a green light form the European finance ministers on the process which would allow them to announce a debt swap as part of the Greek debt restructuring to take place even by the end of this week.”

According to him, if those things fall into place then the path appears clear to the next big summit in early March which is probably when markets may see the final go ahead on the second big bailout as well as on the fiscal treaty.

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

Q: The sentiment seems to be quite bullish and we are tending to neglect the negative cues. Are people willing to put in more money in Europe despite the sharp rallies that we have seen across equities or are they getting a bit skeptical because the fundamental newsflow has not been as supportive?

A: There are two things going on here. The first is it’s a little bit of a reverse in profit taking following the more positive news out of the Greek deal which was tempered overnight by the sovereign ratings actions that were done by Moody’s. It’s an opportunity there for some people to take in some profits from the last couple of days.

But to some extent it also reflects that the mood from Moody’s cutting some of these sovereign ratings was actually a catch-up move to the other agencies. The exception there is probably Spain and Portugal, both of those now have the lowest rating with Moody’s after last nights actions and its relatively positive for Italy and probably France as well which maintained its AAA.

Q: Will the EU meeting tomorrow be a clean giving of money to Greece – that long awaited 130 billion euro or will it be a kind of a messy halfway house where you put in an escrow and say upon good behavior the money is released? How will the markets respond to any of these scenarios?

A: We don’t have the full final sign-off on the entire bailout tomorrow. There are still some hurdles that need to be cleared and tomorrow what we may see is at least a green light form the European finance ministers on the process which would allow them announce a debt swap as part of the Greek debt restructuring to take place even by the end of this week. If those things fall into place then we do have a clear line through to the next big summit in early March which is probably when we would see the final go ahead on the second big bailout as well as on the fiscal treaty.

We have to remember we are going to start getting GDP data from the Euro area today and tomorrow and that’s going to show the extent of the output contraction in Q4 which was probably moderate, but it will give us a sense as to where we are going into at the start of this year as to whether the recession that we think the Euro area is currently in is really going to be short-lived and shallow.

Q: How would you expect the markets to trend? Will it be entirely data dependent or do you think this coming tranche of money from the ECB to the banks would keep markets well bid? Are you looking for more juice in the rally basically?

A: There will be a little bit, but it’s too soon to say there is a clear trend ahead. We are still going to be trading on headlines and on some data points. I don’t think there is a way to take a clear fundamental picture unless you are taking a much longer perspective. In terms of the weeks to come, there is still scope for small accidents to take place in Greece and there is still scope for downside news on the data front. So, there are still reasons to be slightly cautious.

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