Euro headed towards 1.20, says Lloyds TSB's Trevor Williams

In an interview to CNBC-TV18, Trevor Williams, chief economist, Lloyds TSB talks about the continuing negative news stemming from the euro zone. He says the immediate concern is Greece as it is closer to an exit but does acknowledge that the other worries - Spain and the euro are not too far behind.

Below is an edited transcript of his interview. Watch the accompanying video.

Q: We did have a significant correction yesterday on the concerns regarding Italy, Spain and even Greece. What do you think is the biggest worry factor at this point?

A: It has got to be the euro and it has got to be Greece. I know the attention at the moment is on Spain but the most immediate one is Greece because it is closer to the exit.

Q: The euro however has seen a bit of a recovery, it is currently at around 1.24. How much more downside do you see on the euro at this point considering that it went down to levels of around 1.23?

A: There is a very important support around 1.23 and so it is facing resistance in going through that because if it went through that then the next move will be to head towards 1.20. That is why it is sticky around these levels. It is awaiting new news now.

The new news would be saying obviously the results of the elections in Greece and any more bad news out of Spain about the banking sector. My view is that it is going to go towards 1.20 before this is resolved because Greece will leave but I think it is not going to be a straight forward path. Even if the anti-austerity parties lose the elections on June 17, I don’t think the austerity parties would be able to deliver.

Q: Do you see Greece exiting in the immediate short-term after the elections and if the leftist Syriza party comes to par or do you think you could have a Greece exit over six-seven months by 2013, by when Europe will also have a time to grapple with the issue and it may not lead to a capitulation phase in equities?

A: Yes, it won’t take that long. This is the sequence of events. If you get an anti-austerity party in power and they start to try and renegotiate the deal and the troika say - no, we won’t renegotiate it then they will refuse to pay Greece its part of the money to pay the bond repayments that they have on a monthly basis. You will have a crisis as soon as July or August, no later than that if an anti-austerity party coalition gets in and they try and renegotiate the deal.

Q: Even if Greece leaves or stays in the euro the fundamental problems of Spain, Greece and Italy don’t remain solved. What would then possibly be the fundamental solution to the macro economic problems that these countries do suffer from?

A: They need deep structural reforms around making their labour markets more efficient, about making it easier to do starting up businesses, closing down businesses, the efficiencies that funds need in terms of the process of getting access to finance. There is a whole host of reforms they need.

In the labour market for example, they need to make it easier for firms to hire young people. They need to make it more flexible in terms of working hours. It doesn’t mean that people won't have fair conditions at work. It just means that they require more flexibility so that firms are more comfortable in hiring people - like the retail sector, the services sector. They have a big challenge ahead of them.

Q: Globally, particularly, in Europe and even in the US what's the feeling with regard to risk assets? Do you think there has been a significant correction in every decline? Could there be some buying or are people just waiting on the sidelines because they don’t know where it’s all headed?

A: People are buying and selling all the time. The money has to go somewhere. So the money is out there. Some of it has recently left equities and there is a split between European equities, Asian equities and US equities but the fact is that money will always be put to work and there is always fund flowing between different asset classes. It’s just a question of aggressiveness of the leverage that has been used.

Q: The Spanish bond yields have been above 6% for quite a while now and are currently at around 6.5% but we also had the Italian 10-year which spiked above 6% momentarily though it’s come off today. What are the bond markets telling you in terms of the fear emitting out of Spain and Italy now?

A: That they are worried about getting their money back that they are looking for more problems in the banking sector, they are looking for potential default and they are seeking safer assets is what it is telling us. They are telling us about recession risk, of deflation fears, of fears of repayment and of default risk.