Grexit: Vulnerable euro can slip to 1.15/$, says IG Markets

European markets rallied on news that Spain is set to receive a booster shot in the form of 130 billion euro. Viewed as a short-term fix, market watchers are hoping the euro zone’s policymakers take more decisive steps in safeguarding the regions longer-term stability.

The EU and IMF have now committed 500 billion euro to European bailouts of Greece, Ireland, Portugal and now Spain.
And according to Justin Harper, head of research, IG Markets, Italy is definitely next on the agenda for weaknesses and needing money. Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more. Q: Spain will get that 100 billion euro, not the least because the rest of Europe would want a stable Spain. Do you think this puts a bottom in terms of where the euro and equity assets across the world may go or do you think this is just a temporary respite?
A: Sadly I think it’s the latter. It’s a temporary respite. Nothing has been solved in the euro zone just by Spain given 100 billion worth of euro to save its banks. I don’t think it changes the bigger picture. Obviously, we have got a Greek election coming up over the weekend. The spotlight now falls onto the Italian banks and that’s just as in a bad a situation.
Sadly, we might see a bounce in the markets possibly today and tomorrow, but after that I think, its looking more what other countries will have to go to the EU. Italy is definitely next on the agenda for weaknesses and needing money. So, I don’t think long term this has changed anything. Q: Earlier when Ireland, Greece, Portugal got bailouts it came with very strict austerity conditions which had resulted in these countries seeing their growth slowdown. Any indication for Spain, what the conditions are going to be?
A: Spain has one of the highest unemployment rates in the western world and its economy is in contraction. With this money they will obviously shore up the finances of the banks, but it will do little else apart from that. If you look at the euro zone and what happened to Greece, Italy, Ireland and Portugal, nothing really solved anything there apart from giving them a bit of respite from the markets. We move into the Greek elections, we look at the euro and we see some huge problems there that are unlikely to be solved anytime soon. Q: How will you play the various asset classes? Is the euro already a sell for you at 1.263 thereabouts? What about other risk assets which are rising largely because one hopes that things will not implode in Europe?
A: The euro has sort of rallied a little bit to 1.26 at the moment on the back of the Spanish deal. However, we see it sort of heading possibly to 1.15 if Greece pulls out of the euro zone. So, it’s definitely got a lot more downside risk. It depends on you adversity to risk really because at the moment we are looking at very volatile markets. With the Greek elections coming up, looking at the US economy, China, there is still so much negativity about the market.
You have to be very brave to be playing these sorts of risk assets whether it’s on commodities, currencies or equities. There is an argument for being very defensive, investing at the bottom of the market in defensive stocks that pay a good dividend. That could be a safe sort of a bet at the moment. Q: How are investors viewing this rally that we have seen in European markets for the past few days? Are they using this green on the screen to exit their positions?
A: I think so. We are definitely seeing that ourselves this morning with the euro. We have seen a lot of people selling it because it’s at a sort of recent high and they think there is going to be more downside risk to come ahead of the elections with these choppy climates and other people are obviously getting in, in what they think is the bottom. So there are different camps that people are sitting in. Q: How would the euro go into the Greek elections itself? We don’t know how things will pan out thereafter, but by Friday could something be erased?
A: Possibly. We have seen quite a strong bounce over the last couple of days. But there has still been the element of caution. No one’s getting ahead of themselves. A lot of this has been factored into the market obviously hitting sort of below 1.25-1.24 as of last week. I think we will head into the Greek elections with definitely an element of caution and then obviously all the eyes will be on the euro after that to see how it reacts to whatever government comes into control.