Threat of N-S Europe tiff amid tepid ECB looms: Schulz

Christian Schulz, senior economist, Berenberg Bank explains to CNBC-TV18 that the next lot of bad news could come from the countries in northern Europe on sentiments of being short-changed in the effort to rescue the economies in southern Europe.

Schulz forecasts that the northern European nations might set very tough conditions at the various negotiations across Europe that could derail rescue efforts and spook the markets again. Below is an edited transcript of the analysis. Also watch the accompanying video. Q: What are you making of the slight pullback in the currency market? The euro-dollar went to 1.222 on Monday which was another two-year low. Spain's finance minster has agreed to extend the nation's fiscal deficit deadline by one year. Are the banks' recapitalisation decisions helping or would you wait for more incremental measures for the euro to record a sustainable bounce?
A: I think the Spanish finance minister's announcement on Monday were mildly positive. Europe is learning from past mistakes. In implementing the Spanish adjustment programme, care is being taken that the measures are not too tough to avoid sending the economy into a negative downward spiral as in Greece.
Regarding bank recapitalisation, measures have been taken to avoid the vicious circle between bank and government debt. Spanish banks will be directly recapitalised by European national banks.
Though Europe is learning from its mistakes, it is probably not enough to address the underlying problem of a lack of trust that the government will be able to repay its debts and that the ECB and Europe will do enough to keep the euro zone together.
These decisions that were taken on Monday give a bit more detail to overall positive decisions at the EU summit two weeks ago. But decisive action from the ECB is still lacking. Q: Do you think that the market will start sulking if the ECB does not respond with some proactive bond-buying like it did in February and in December? Spanish bonds already touched 7%; do you think that they could start now sulking even more?
A: Europe is definitely very vulnerable. The effect of the individual positive news on the markets is brief and the markets always react more viciously on any bit of negative trends. So there is a big downward risk as long as there is no real convincing intervention from the ECB. This trend is likely to persist, so Europe is going to remain very vulnerable. Q: Where will the next booby-trap of bad news come from? Is it likely to be from bond auctions or conditions put forth for future bank capitalisation?
A: It’s quite likely that these negotiation processes that we have in Europe now about the details of the banking union over the details of the European Central Bank getting overside over banks will be fraught with a lot of controversy.
We've had a summit two weeks ago which was sold as a success for the southern European countries which created a lot of political backlash in the northern European countries- in Germany, the Netherlands and Finland. Now these countries and their governments are going to try to regain and seem as strong as possible in the negotiations.
And that will obviously create a lot of nervousness because these countries are going to insist on very tough condition and as long as there is no ECB intervention, it's very unlikely that the markets will really rebound in a more sustainable manner.