Greece election: What should mkts be ready for on Jun 18?

Q: Is there any chance of a third election at all?

Taylor: It cannot be ruled out but I think generally people think it is more likely that given the further uncertainty, which will be good for Greece. The third election would bring what at the moment we think is considered more likely the technocrat government would come in.

Q: To leave the third option aside for a bit and to focus on the first two outcomes that we discussed. Your comments did indicate that you believe whether it is the pro-bailout parties or the anti-bailout parties that come to power in Greece, a renegotiation of the terms of the second bailout is a given. It will take place, it could be less hardlined depending on who the winners of that election are but that there will be a renegotiation.

In that case what do you expect will be the content of the renegotiation assuming it will be a long drawn out renegotiation. What kind of pain do you think that will inflict on global markets? What will it mean for interest rates across the peripheral countries? What will it mean for central banks wanting to step in and help quell the panic? How will that situation go down?

Taylor: So if things are likely to be included in such a package perhaps reduction in interest payments on a restructured debt and also sweetness perhaps with regards to AIB investments in the country so further encourages the growth essentially. The market hates uncertainty and this will create huge amount of uncertainty so you are likely to see further fiscal tight move.

 It is a difficult call on central bank action perhaps difficult to see any major co-related central bank action. This is just a general risk-off move headline type trading where perhaps one party negotiation comes out with something positive, classic negotiation position where each side wants to give just enough to get as much as they can.

Q: Given all the noises that Central banks have made in the run up to this election weekend, are you feeling a little more reassured that no matter what the outcome, there will be enough backstopping available? There will be enough political action available if the worst case scenario whatever that maybe were to come to pass?

Lolay: As I said I don’t think the worst case scenario is next week. I think what we are going to get is a message about how difficult the circumstances are in Greece, what we need to do. It is not the worst case scenario, the worst case scenario will happen in the future like I said.

If Greece cannot afford to remain part of the euro area, that is not the case now. I think either party along with this government there will have room to negotiate the actual scale of negotiation will be under consideration. I think a lot of efforts will still be made to keep Greece in the euro area. The issue, is like I said, this continued uncertainty and how long markets will give them time.

Q: What impact will the outcome of this election have on a third round of quantitative easing; the FOMC meets next week or even a third LTRO? Though I do know that ahead of the ECB has been stressing on the fact that the effect of the second round have not yet been fully felt?

Taylor: Personally I cannot see another LTRO. The banks now generally have as much as they need. So it didn’t help bring sovereign yields down in 3-5 months of region so we possibly cannot see another LTRO would have any significant long-term effect or benefit. With regards to the US, it cannot be ruled out but again it is not immediately something we see on the horizon.

Q: Since you have made it clear that it is impossible to look more than 24 hours down the line? What are you preparing for on Monday based on instinctively? What do you think will be the message that the Greek public send out to Europeans and to people across the world, what are you advising your clients to be prepared for as well?

Lolay: I personally am hoping for victory for New Democracy for pro-bailout victory and therefore some positives to come on the back of that. Then what we would hope to see is negotiations begin and therefore Greece probably get an easier time of it that it has had previously.

But in the worst case scenario, we have to be ready for coordinated action and possibly particularly its strong reaction on the banking side and the sovereign side to support some of the weaker sovereigns at this time.

For my clients, I have been particularly advising that basically stay clear, have an open mind to whatever happen. We saw only last week with the Spanish deal a lot of markets were spooked by what happened there when the consensus was that it would have been taken positive, it has been taken very negatively. Markets are not behaving very rationally at this time and that is a concern for everybody in the market place.

Q: What are you telling your clients?

Taylor: We are personally favouring long bond positions so primarily bond flatness. It has been a bit of a quite aggressive sell-off and indeed there was a sell-off in the first LTRO which was the last peak in the market uncertainty. That is the way we are trading this, so long call essentially in the eurozone. I think interesting trigger is a fall in euro dollar because that could mean the sign that people are moving out of euro assets.