Hope to see roadmap for fiscal, political union: Finaport

Hans Goetti of Finaport hopes that European leaders will lay out a roadmap for fiscal and political union for the eurozone this summit. However, he does not hold his breath.

In an interview to CNBC-TV18, Goetti says that this summit might disappoint again, as many before. “They lowered the criteria for collaterals and it looks like they are preparing some LTRO (long-term refinancing operations) or quantitative easing again,” he said.

This, however, will not be enough to boost markets anymore. He says only concrete steps towards tackling the region’s debt crisis will lift markets, and otherwise the rally will be very short.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: What is your expectation from the European Union (EU) summit?

A: Well you could almost say it’s another week another summit. People are always looking for some big plan, big solution to everything. I would say more quantitative easing (QE) by the European Central Bank would not be the solution. They lowered the criteria for collaterals and it looks like they are preparing some LTRO (long-term refinancing operations) or quantitative easing again.

I think what would be desirable would be to look at the plans for more fiscal integration and a roadmap for political union. But I'm not holding my breath because we have been disappointed so many times. We will have to see what comes out. But any indication that Europe moves closer together towards a fiscal and political union will be a step in the right direction.

Q: But Angela Merkel has clearly indicated that a joint Eurobond is not something she favors. Is there anything else which ic workable or is this summit going to be only one of negative outcomes?

A: Well the negative outcome will be some announcement with no concrete plans. I mean what we would like to see is a roadmap. What could also be resurrected is there’s a German plan that was hatched in 2011 about the facility where every country that has more than 60% of debt to GDP ratio will be able to put that debt into a sinking fund and that will be administered by Germany. Of course politically it is very explosive, but it would be an attempt to at least try to pare down debt.

If we see an attempt to pare down debt which has some substance, that would be a step in the right direction. But then again political obstacles are great; you have Germany on one hand and you have to rest on the other who thinks Germany should come up with more goods, should pay up. Germany is not quite willing to do that unless it is an exchange for a sovereignty, a loss for the others and have more of a say in their budgetary matters.

Q: What you are saying is that a sustainable solution will remain illusive at the EU Summit and the best that we can expect is perhaps another one of those band aid type solutions. In such a scenario, how do you expect the markets to react?

A: Well again it depends on what the outcome will be. If it’s a step towards fiscal and political integration, there could be some stability. But then again markets have been trading based on stimulus packages, liquidity by central banks and so on. Whenever you have just a slightest hint of QE, you have risky assets going up.

Now what has happened lately is that there is a law of diminishing returns setting in when it comes to QE. It seems that these rallies in risky assets are getting shorter and shorter. You've seen it over the past few weeks with certain events taking place, like the FOMC meet where everybody expected more but there was no rally at all. You know these rallies are getting shorter and shorter and at some point markets will start trading based on fundamentals. You cannot only trade on liquidity creation and that’s what is going to come out.

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Q: How grave is the situation in Spain now?

A: Well the problem is very grave. If you are at 6.5-7%, that’s a level where other countries have sought the bailout. We think the situation in Spanish is very grave because they have refinancing needs to the tune of about 500 billion euro for the next few months. So that’s going to be a drag.

I think we have to watch the interest rates quite closely, not only the 10 year bond but also the 2 year bond; the 2 year bond is near 5%. A lot of Spain’s financing has been at the short end of the curve, so that is a bit of a disturbing sign.

Q: How are you placed on the Indian market? As you know yesterday the Indian government announced a slue of steps to increase debt dollar flows into India. Will that suffix to stem the rupees rout?

A: Well quick fixes usually do not help a currency. If you want to strengthen a currency, you need structural reforms and of course those take time. To be fair, the rupee is not the only currency that has come down as result of the risk off trade. Other BRIC countries have seen the same thing; the Brazilian Real is down, the Russian Ruble is down and even the Renminbi has weakened a little bit. So India is not along here.

I think what is needed in the long run are structural reforms that will underpin the rupee. I think what’s positive in the near term is that oil prices have come down a little bit and that should alleviate the pressures on the fiscal side in India. But we need to go back to an environment which is in the absence of a eurozone crisis, where we go back into riskier assets and I think that is what the driver for India and the currency.

Q: What's really driving crude prices so much lower and how would you expect it to move? Will it remain sub-USD 100 levels?

A: Well at the moment its relatively weak demand. We have a slowing global economy, so demand is obviously coming down. You also have more and more usage of natural gas in United States; you have shale gas which has pushed natural gas to very low levels, and I think in the long run this could be very beneficial to the United States because they can burn natural gas instead of coal.

I think the political risk at the moment, you can always have something happening in the Middle East again, but for now there is less talk about that. So I would think that for now there is downward pressure on the oil price and it would probably be like that for the next few months unless we see signs that economies are recovering again.