Risks in Europe adding to mkt woes; Spain big problem: UBS

The European markets are trading in red and Stephane Deo of UBS Investment Bank said a number of political risks looming on Europe is leading to a lot of concern. Moreover, the pending solution on Greece and France's downgrade has added to the market woes.

Deo further believes that Greece is not the bigger problem in the eurozone, it is Spain which is more of a worry. If Spain indeed opts for the Outright Monetary Transaction (OMT) it would be very supportive for the market. Also read: How global markets are stacked up for 2013? Here is the edited transcript of the interview on CNBC-TV18. Q: What is the market's worry at this point in time with respect to the eurozone finance ministers' meet over Greece?
A: There are a number of things happening at the same time. First of all, yesterday we had a deep rally above 2 percent or more for the stock index. We have a kind of slight pull and today the second thing that you are mentioning is there are a number of political risks looming especially with the summit this afternoon and the solution for Greece.
We heard some positive news but, we will have to see if there is a conclusion indeed. There is also downgrade of France this morning which might have added to some extent to the wariness of the market. Q: Would you expect that Greece will get the money by end of day or end of summit?
A: Yes, Greece will get the money. It's the usual secret drama that you have in Europe every three months. The question is whether they get to it at the end of the day or whether the negotiation will drag on. If negotiation drags on, you keep the uncertainty in the market but, I think the question is not 'if', it is 'when'. Q: The Greece tail risk is being removed if what you are saying is right. Largely the money should come in and that should sustain at least till Angela Merkel is in power, which is till 2013. So what next do you watch out for? The market seems to have forgotten that Spain and Italy’s yields were not too high, even yesterday it was in a slightly declining mode. What do you think is the thing to watch out for in Europe in the near term?
A: I think Spain is the big problem from my point of view. I do not think Greece is a big problem because there is a plan for Greece. Every three months this problem of negotiating comes up but, that’s as usual. I think the real issue is Spain and whether they will go to the Outright Monetary Transaction (OMT) or not has to be seen.
Our point of view is that this is almost unavoidable because the issuance next year will not be absorbed by the market. The question is when and how Spain goes to the OMT. The hope is that they have reached an agreement with Europe and they go and request for help preemptively in the next few weeks. Obviously, that's not our central case scenario but that's a possibility and that would be very supportive for the market if it happens.
_PAGEBREAK_ Q: As we step into 2013, would you say that the risk of the European Union is looking different from 17 members, maybe one walk out or more still persists or do you think that at that point, people will not allow it because you pull the plug and then you pull the plug on more than one?
A: Our view has always been that the probability of a euro breakup was very close to zero. I never believed that any country would leave the euro, even Greece. I always say that it was very low probability and one of the reasons is exactly what you mentioned. If one country leaves then it is impossible to convince the market that no other country will follow and then Portugal, Ireland or even Spain or Italy will come under very heavy pressure. I think the ramifications of an exit are very dangerous and nobody wants to take this risk. Q: You head asset allocation at UBS, what are people doing right now, in US, you have the fiscal cliff issue, there are some positive noises but there is still lack of clarity in Europe, perhaps Greece could be a positive factor but Spain continues to evade, what are people looking at in terms of allocating their assets?
A: To be honest, I think Europe is not the main worry anymore. People are talking a lot about the fiscal cliff and I saw a survey of investors, not long ago and for the first time in years the worry of people was more in US than Europe. I think that is probably one of the reasons of the rally we had yesterday because there was some noise coming from the administration and the senate that it might reach an agreement.
We are very focused on Greece today because of the European meeting but, the real problem for the market for the time being is the fiscal cliff and how and when it will be resolved. I am not denying there is a big problem in Europe. That is obvious but, I think the market focus is much more on US. If you have a quick resolution of the fiscal cliff, that could be very supportive for the markets again. Q: But, what is your sense, will a quick resolution happen at all or will people agree on broad principles of raising taxes and cutting spending but squabble all the way on the nitti-gritties and so you have postponement of the timetable by six months or twelve months, is that the more likely scenario?
A: It is a possibility. If you postpone the fiscal cliff by three months saying, sorry we did not reach an agreement, we need a little bit more time, I think the market can swallow it. If you postpone the fiscal cliff by six months, I think there will be a lot of critics on politicians being unable to take decision, on no clarity and you already see the impact for instance on investment decisions, which are extremely low because of this uncertainty. The hope is that they get to an agreement as soon as possible and a six months delay would be damaging for the economy and the market as well.