EU likely to give Greece more aid, says Lloyds

Trevor Williams, Chief Economist with Lloyds spoke to CNBC-TV18 ahead of the EU meeting next week. He thinks Greece will be given money in order to save market from turning more negative. Williams feels that the PMI for France has reached the bottom of the slowdown cycle and only a continuous trend of data can suggest the future possibilities across euro zone.

Below is an edited transcript of Trevor Williams’s interview on CNBC-TV18. Q: What is on the market’s mind at this point in time, is there a feeling that Greece will somehow get the money when the EU meets next week?
A: Yes, otherwise there would be a lot more red on the screen. There are no signs that this is going to be a `no'. They are just wrangling over the final thoughts of 2016 date of the deal and are finding a solution to get over the funding hurdle over the next two-three years. Q: What do you think about data points? We just had the French PMI numbers; US data has been encouraging over the past few days. Do you see this improvement in data to continue or could that be a problem for the market going forward?
A: I think the data is a problem because overall they suggest that the activity in the euro zone has slowed as we enter Q4 and after a small contraction in Q3, it looks like it could be another contraction in Q4. The good news is that the PMI for France is suggesting that maybe the bottom of that cycle of slowdown has been reached. It is too early to say; what we need to see is a continuous trend of data across euro zone suggesting that softening is no longer taking place.

Q: The European Union’s budget is going to be discussed, do you expect that to become a stormy affair run over into the weekend with people not being able to agree on spending cuts?
A: They are of course trying to get spending increased in the budget and the issue for the UK is that they do not want to agree a budget increase at a time when the public spending cuts are taking place in so many economies. It will be an obstacle and the UK may well get voted at the end. It remains to be seen whether they will end up agreeing if there is some rebate in the UK. So the politics there is convoluted.
However, by the end there will be an agreement on the budget. It is not a major issue with regards to financial markets because they know that some formal budget will be passed. The question was around some of the euro zone economies and whether they are going to get the bailout money that is required to keep them functioning.

Q: Do you track the action on the currency market, particularly the Euro-Dollar? After the French downgrade there was a knee-jerk reaction and again when Greece didn’t get the money yesterday, there was a knee-jerk reaction which then manages to get above 1.28 mark. The market seems to be factoring, negatives are unlikely to play out. We’ll have the base case scenario planning that is getting the money. What do you think could unsettle this? Is there anything with regards to Spain that you would be worried about, is there a risk that the market is not factoring in at the moment?
A: There are lots of risks they are not factoring in. They are factoring in quite a lot of good news if you look at the way the underlying economies have been performing. The equity markets look rather strong. The bond markets are pretty much where you would expect them to be, they are pricing in continuous slow growth and continuous weak inflation. You could argue that credit spreads and the equity markets are a bit too buoyant. On the other hand, there is a lot of money pumped into the system by central banks globally. Q: If you look at the first six months of 2013, do you think we may see some kind of demand from Spain and therefore there would be some bond buying? How are you looking at the key scenario in terms of policy decisions taken by the ECB in the first six months? That will have a repercussion on the Euro-Dollar and indeed on many things, an LTRO or an open-market transaction. Will all that be used in the first six months?
A: Open market transaction depends on Spain’s seeing a bailout claim. Obviously, they don’t want to because they are going to be locked into an oversight, the debates that they see with Greece on whether they are going to get money or not at the quarterly tranches. In the first six months there is going to be another round of issues about releasing money for Greece externally, of amount 31.5 billion of the currency. There will be another one in the first quarter or will be released in the first six months of next year. So that is going to come back.
There are issues about Cyprus needing a bailout, there are issues related to Portugal. There are lots of things which will keep markets unsettled in the first six months of 2013 and lots of other resolved issues will continue to play through the financial markets.