Clash of Spain and ECB worrying investors: Verstrate

The uncertainty over Greece's exit from the eurozone was already playing on the European market sentiments. Now, the news of Spain issuing new bonds for funding its ailing banks and indebted regions, have not gone down well with the European markets. It is believed that the move will worsen public finances.

In an interview with CNBC-TV18, Bruno Verstrate, CEO of Lakefield Partners said that the volatility is expected to continue till 17 June, when Greece is scheduled to go for the re-election. Verstrate believes that Greece wants to stay within the euro and do not like the consequences of the exit. He also believes that the worrying factor for the market is the clash between the Spanish government and the European Central Bank (ECB). 

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: A word on the European markets. What is the worry factor today? We have a up day, one down day. Today seems to be a down day. What is vying markets?

A: I think there is a serious clash between the Spanish government and the ECB. The investors are getting worried that Spain is economically much more important than Greece. This is a situation which is evolving in the wrong direction.

It is clear that ECB will takeover the main row and that they will need to show what the strategy is. So far, they have not bought any of the bonds, but in the end it will get to that situation.

Q: How do you think events are possibly going to play out in the next couple of weeks and up to 17 June because now the ECB is going to take cognizance of what is happening in Spain along with the problems in Greece?

A: I think the volatility will continue in the weeks to come until the Greek elections have taken place. What I suspect is that the Greeks want to stay within the euro. They do not like the consequences of it. I think the consequences i.e. the austerity will weaken a bit or will be changed in one way or the other, whether it is acceptable to the voting public or not.

Of course in the meantime, the contamination towards Spain is a much bigger trend and that’s something that needs to be handled right now. That key is in the hands of the ECB. They will either have to buy bonds or show a way to commit themselves that they do not want this situation in Spain to get to something that is completely out of control.

Q: What are investors talking about in Europe at this point in time? When can we hear something decisive from the ECB with regards to a constructive event or an action they can take to solving or possibly trying to solve the problem?

A: What you see is a political clash between France, Italy and Germany because the majority within Europe is in favour of the euro bonds. Germany at this point, is the only isolated country which is against it and that is unsustainable.

If you believe in democracy then sooner or later they will have to admit that these bonds are the way forward. It remains to be seen how fast they could do it because what always seems to play against them is time. At this stage they do not have time to let this whole situation run out of hands, especially since Spain is an important economy in Europe.

In the meantime, what helps Europe is the fact that the euro has dropped quite substantially. That helps Germany in the first place with its exports which are becoming more competitive due to that.

Q: The euro-dollar had levels that we didn't even see when the concerns around the Greek crisis were at their heights. Do you think Spain and the concerns around the banking system are a bigger problem potentially, even as compared to Greece? What is the situation in Greece, you think the market has shifted its attention away from Greece after the opinion polls?

A: I think Greece at this point is more or less a symbolic issue. Economic impact would be rather limited since the haircut already took place, the write-offs in the banks are already accounted for. We know what the damage for Greece is and would be.

We cannot judge what the damage of Spain would be potentially. That is of course a much bigger threat only because of its sheer size. I think Spain is a multiple of the size of Greece. Clearly, Spain is much more dangerous, needs to be much more careful.

From a political point of view and symbolically it is important that Greece stays within because we do not know what contamination Greek exit would cause on the euro and on the European monetary union as a whole. That is the only importance to the Greek elections.

We need to see how it is handled and we do not want to set up a precedent for the rest of the countries. In the meantime, the markets are contaminating Spain, the interest rate levels are at the much higher level and it is unsustainable at this stage.

Q: As we speak, we are getting some headlines with regards to Spain where EU may extend Spain's deficit deadline to 2014. Does that hold any importance to you or do you think most of what is happening in Spain is factored in and consequently, when the ECB meets next Wednesday, do you think there could be a possibility of hearing something constructive in that meeting?

A: I think there has to be something constructive. What will help is the election outcome in France and Germany. That will give the ECB more of a mandate to focus on growth, perhaps look a bit at something which is a bit more inflationary.

I think that would be a positive evolution. Of course, extending the deadline on reducing debt is something which is only kicking the can forward again. It is a political solution but it is not a fundamental solution.