Greece may leave eurozone without breakup of EU: Nomura

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Alastair Newton of Nomura International tells CNBC-TV18 that Greece is not essentially the primary factor for the recent market buoyancy. "While Greece will remain a watch-point for the markets, it is rather ECB's LTRO that is the most predominant factor in the markets' minds'," he says. According to him, the second round of LTRO, expected on Feb 29 is what markets are watching right now.

Newton says that the political turmoil in Greece is likely to continue and the nation will find it tough to implement austerity measures. "I certainly don't discount the probability that Greece could leave the euro zone without a breakup of the euro zone in the foreseeable future," he says.

He believes that a disorderly default in Greece may trigger a credit event that could move markets globally.

"It is the debt market that remains more skeptical than the equity market right now" he says.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: How important do you think the resolution in Greece might be and how do you think that resolution might finally play out?

A: First of all, I don't think this is the most important factor as far as the recent market buoyancy is concerned. I think we have a lot to thank the ECB for. LTRO seems to be the single most predominant factor in markets' minds at the moment. Lot more attention, I would suggest, is on what is going to happen to LTRO when we get to the 2nd round on 29th February than what is going on in Greece at the moment.

I think markets have largely discounted for Greece, I don't think markets are going to be particularly impressed by a deal, the questions are still going to remain - will Greece stick by the terms of the deal? What will happen after Greek elections which is likely to take place in April? Will the North European, the credited countries, the remaining AAA's actually deliver on their side? If we consider that on Tuesday this week, both, the Netherlands Prime Minister Mark Rutte and the Netherlands European Commissioner came out with public statements saying that actually it didn't matter that much if Greece did leave the eurozone because that is sort of thing could now be contained. The weight of euro skepticism in Netherlands, the balance in parliament where the government is beholding to the euro skeptic PVV (Party for Freedom) for its majority and support from the left and the socialist as euro skeptic PVV are gaining votes there. There are risks around the deal and I think the markets are going to view Greece very cautiously indeed especially since the general consensus is that Greeks will have to a have a further debt write-down to get to sustainability.

Q: It has taken a longer than what one would have thought already, couple of deadlines have been missed. How difficult is it politically you think in Greece to push through or to cobble together what they are trying to do?

A: Well, I have a lot of sympathy for premier Papademos; he really was given a very hard task indeed when he took over. Greece's politicians, as opposed to technocratic Papademos, do seem to have their eyes firmly on the upcoming general election. It's going to be very difficult indeed to implement the terms of any deal in Greece which is going to impact on public sector unions. We are seeing successive waves of strikes. The political situation remains very volatile indeed. I would expect to see continuing unrest, strikes and political turmoil in Greece for the foreseeable future. Austerity is hitting the Greek people very hard, and as yet, Greece, I regret to say, is only at the beginning of a very long hole indeed to get itself back to international competitiveness.

Q: How crucial is Greece you would say for the EU region though for example do you think it has the potential to break up the EU?

A: I am not one of those people who put a high probability on the eurozone breakup. One can't rule it out of course, one would be very unwise to rule it out at least. But equally, I certainly don't discount the probability that Greece could leave the euro zone without a breakup of the euro zone and in the foreseeable future.

One can argue for a long time about whether that would ultimately be a good or a bad thing for Greece or indeed the rest of the eurozone. I don't think that's the point at the moment. We have seen Angela Merkel again this week expressing determination to keep Greece in the euro-zone but I thought it was interesting that she chose the word that she wasn't going to be responsible for pushing Greece out of the euro-zone, implying this really is a decision for the Greeks themselves. But I certainly think that that is the case.

Whichever scenario we look at assuming we don't get a breakup of the euro-zone altogether and I am correct in that we are looking very much at that muddle through and I think clearly the ECB will continue to play a key role. The other point to keep in mind is we are now getting clear intimations from the Germans including Angela Merkel that once the fiscal compact is ratified, assuming that it is, then Germany and others will be looking to more pro-growth policies. Now, these may go further than just structural reforms or long term growth improvements which those imply.

The ratification process though is not straight forward. In particular, President Sarkozy of France has said that he will not put the fiscal compact to the French parliament for ratification until after the French presidential election. Of course, opinion poll is telling us very strongly at the moment that he has a mountain to climb to win a second term of office. If indeed polls proves right, and Francis Hollande is sworn in as president in May, he has committed to renegotiate fiscal compact - that could be its undoing.

Q: The key point as you mentioned earlier is really the ECB and the LTRO. Do you think this kind of strong liquidity which is supporting markets globally will continue for the next few weeks?

A: Talking to clients in Europe in the last few days, what I have noticed is there is a real difference in sentiment between equity portfolio managers on the one hand who are cautiously optimistic, they believe the rally has further to go by and large, there are some exceptions to that, and fixed income portfolio managers who are much more cautious indeed and concerned that what we are seeing is a classic early year bounce in markets and it may not be sustainable, given the stresses and strains which exist in the euro-zone today. I am going to be very cautious here and say I think in many respects, it is too soon to tell definitively one way or the other. What is clear to me is that there is still a long way to go in the euro-zone crisis and that is likely to continue to act as something of a drag on markets. Even though some of cyclical economic data which we have been seeing recently are considerably better than might have been expected by most market participants and the commentators as recently as four months ago, if we think back to where we were in September, things look a bit better now at least than might have been expected at that time.

Q: Aside from the political ramifications though if there is failure from Greece in order to push through an accord how much of a financial crisis do you think it may lead to? Could it be the reason for a big breakdown in the equity market rally?

A: I certainly think there is a risk to that. If the Greek deal comes unhinged if we get a disorderly default in Greece, we do believe that we are going to see a further write-down or default of some sort in Greece and we believe that will probably trigger a credit event and that CDS will be sparred. In many respects, we would regard that as being the lesser of two evils in the sense that if we don't get a credit event, in the event of another debt write down or default, that would almost certainly mean that spreads in Europe will blow out again because CDS will be seen as valueless by market participants.

It's a tough call for markets. It's a tough call for policy makers.
If it is the case that the ECB is going to be prepared to take a write-down on Greek debt - that will probably be a positive as well. But much is to hinge on what happens in the second LTRO, the take up on that could be critical in terms of buoying or otherwise the current rally in market sentiment. I have heard some very big numbers floated around markets, maybe a trillion take up. We regard that as pretty implausible. We think it will be a lot smaller than that, maybe 300 billion that could be a disappointment to market and help deflate some of this current rally. So that moment is going to be very critical indeed.