Jun 16, 2012, 08.18 PM IST
It is time to do some scenario gazing on the show. What are the possible outcomes and what should markets be prepared for on Monday morning?
Here is an edited transcript of the interview. Also watch the accompanying videos.
Q: What may be going on in the minds of the Greek public as they go to vote? Do you think that as the Greek public votes this Sunday, will they in effect be deciding on whether Greece stays in the Euro zone or exists?
Lolay: It is going to be perceived like that, but that’s not the case because this still is very much an election. It’s the second election and if we are talking about exit for the Euro area, it is not at this time. It may be in the future that we have to have a referendum and this is definitely not referendum. But what we will find out is, what sort of support there is for the Euro area and if it can survive with the current program and still make it through.
So, it’s a very pivotal election, but it is not the make and break on whether Greece will stay in the Euro area or not.
Q: What do you make of the significance of Sunday’s elections, the outcome and possibly what message the Greek public is trying to send out, not just to Europe but to the rest of the world?
Taylor: It obviously provides a strong indicator but I think the way the politicians are spinning this vote to the Greek people are desperate wants to stay within the euro zone. So, its being addressed up in Greece as a vote, both parties want to be voted on the basis that they will stay in the euro zone. So, I don’t think the Greek people when they vote are deciding whether they want to stay in the Euro or not.
Q: Let me now look at three election outcomes that are possible and you tell me how you see global markets and central banks reacting to these outcomes and whether these outcomes will eventually lead to a Greek exit, may be not in the near term, but over the longer term. The first out come, ofcourse, is the one that markets fear the most. If the anti-bailout parties come to power or come to a majority, how do you think that will impact markets, central bank reactions and what do you think that will mean in terms of determining whether over a period of time Greece stays in or leaves?
Lolay: That is the fear point for markets at the moment. If we do get a Syriza victory in the election then what we will find is initial negative market reaction. That’s not the end of it because Syriza was unlikely to get enough votes to secure government on its own. So, it is going to have to negotiate with the other parties to try and put something together which is likely to make it less controversial and probably ease back on some of its demands.
So, the question is not necessarily that its over, if Syriza wins it’s a question of what will the new government look like and how far will they be willing to negotiate. The issue they will face is that, there is unlikely to be another bailout. They will have to work within the realm of the current bailout. We know that the EU is softening a bit in terms of what Greece may receive in the future, but at the same time it is very difficult to see if they want to have a fundamental renegotiation. They won’t be able to get that and if they are adamant to do that then Greece’s position in the euro area is very much under threat.
Q: I imagine that you will categorize this as a complete risk off event.
Taylor: With regards to the market, there is two ways this could go really. You could see a strong bid for bunds and a further selloff in periphery. Or potentially there could be even a selloff in bunds and a move out of Euro denominated fixed income assets into the dollar. This could act as the beginnings of a Greek exit.
Q: The other and the more appetizing potential outcome is that the pro-bailout parties come to power as an outcome of this election. In that case how do you expect markets will react? Do you see any central bank action thereafter at all required considering that they are pro-bailout parties and then do you see the chances of Greece having to leave the euro zone diminish?
Taylor: Quite unlikely that there will be a requirement for central bank action in that case. I think the initial move will be a risk on move as the market is basically pleased that this combination has come in. But then as soon as the coalition is formed the, negotiations begin expect the protracted nature and difficulty of those negotiations to drive a risk off move essentially.
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