Euro zone tensions may recur despite Greece deal: StanChart

Leaders of Euro zone countries and IMF have agreed to unlock 43.7 billion euros to the heavily-indebted Greek economy.

In an interview to CNBC-TV18, Sarah Hewin, regional head of research-Europe global research, Standard Chartered Bank says it is a good deal. "It certainly opens a way for the next bailout tranche to be paid for Greece," she adds.

According to her, Greece will be able to get the money by mid-December.

The situation, she says, is looking better. "The contagion effect is working in a positive sense now rather than in the negative sense," she asserts.

However, she says, Spain may decide, at some point, in the next few weeks that it wants to apply for bailout support for a sovereign. "Italy faces an election in the spring time. We may start to see some market stresses rising ahead of that. So, still ongoing tensions are likely to reemerge in the Euro area despite a positive outcome," she adds.

Below is the edited transcript of her interview with CNBC-TV18.

Q: What is your reaction to this deal?

A: It is a good deal. Third time lucky! We had two failed attempts previously getting an agreement between the Euro group finance ministers and the IMF. But now they have come to an agreement. It certainly opens a way for the next bailout tranche to be paid for Greece.

Now, Greece has been running up arrears. So, this money is long overdue. In addition, they need to have more finance to recapitalise the banks. So, as soon as the money is paid, I think that Greece can start to plan for the future.

Q: We started this year talking about Greece. We are going to end this year talking about Greece. The deal has to go to the parliaments of the various Euro zone countries. Can we expect the process to be a smooth one? Can we safely assume that Greece will get the bailout money that has been planned?

A: It is not a done deal yet. The parliaments of the Euro area countries have to agree. There has to be a debt buyback as well. So, there is still a potential for things to go wrong at the parliamentary level. But I think that finance ministers wouldn’t have signed up to a deal that they thought was not going to get parliamentary approval.

On the whole, it looks likely that by mid-December Greece will be able to get the money. We have a provisory that the debt buyback, which is an essential cause of this whole process, goes through smoothly. We do not know the details of that yet. But we have seen the cost of Greek debt rising in the markets over the last few days. So, they may not be able to buyback as much debt as they had originally planned.

Q: Very little is known about the debt buyback. It has not been revealed because they do not want the hedge funds to step in and perhaps make the debt more expensive. We have seen a lot of people talking about Greece exiting the Euro zone. Post this agreement, do you think the chances are now lower?

A: I am not sure that it makes sense for Greece to exit the Euro area at any time, but especially not having just received this bailout support. It is clear that Greek exit risk was always there. I think that the risk was much higher. I guess it is still higher in the events that for some reason the bailout tranche isn’t paid. But Greece would go through a huge upheaval even worse than the economic downturn that we are seeing now, if they were to return to the Drachma. So, I do not think that there is any support either at the political level or at the popular level for a Greece to abandon the euro.

_PAGEBREAK_

Q: The Greece deal might be done. But that is not the end of the Euro zone worries. Plenty of economies in the Euro zone are in trouble whether you talk about France, whether you talk about Spain. If you were to talk about the Euro zone as a whole, do you think after this the situation is looking slightly better atleast?

A: The situation is looking better. We can see the knock-on effects in terms of yields for Spanish and Italian debt. So, the contagion effect is working in a positive sense now rather than in the negative sense, which we are used to seen. But there are still vulnerabilities out there. Spain may well decide, at some point, in the next few weeks that it wants to apply for bailout support for a sovereign. Italy faces an election in the spring time. We may start to see some market stresses rising ahead of that. So, still ongoing tensions are likely to reemerge in the Euro area despite a positive outcome.

Q: After last night’s talks the Organisation for Economic Co-operation and Development (OECD) come out with a rather gloomy outlook for the global economy. It is talking of a  very long recession. It has cut its forecast. Were you surprised by that?

A: I wasn’t particularly surprised. The euro area data have been turning down, surveys are pointing to even worse recession in Q4 of this year than in Q3. That, has a bearing on the forecast for next year. The OECD now sees the euro area in recession next year with a contraction of 1.1 percent in 2013. So, it is not too much of a surprise, but it is just a reminder that the backdrop to this sovereign crisis remains very difficult if you have very weak growth or if you have contracting activity. In that scenario it is very difficult to reduce deficits and to stabilise debt levels.

Q: After last night’s agreement of plans to bring the debt of Greece below 110 percent in 2022, next year we will be seeing Germany in the month of September going in for elections. Do you have any expectations that perhaps we will see some of the Greek debt being written off?

A: I think there is a high chance of a Greek debt write-off by its official creditors. Germany has an election next autumn- September-October and I think that we are unlikely to see debt write-downs before that. However, subsequently, there maybe a greater willingness to concede that debt levels of these highs are just too much for Greece to bear. We had a hint from the German Finance Minister, Wolfgang Schaeuble that Germany might be prepared to think about debt write-downs once Greece has returned to a primary budget surplus.

Q: Taking that argument then, does that not actually strengthen the opposition’s case? When we talk about Greece, the opposition has ofcourse rejected the agreement that has been arrived at which includes the International Monetary Fund (IMF). Does this not really strengthen their case because they are saying ‘our debt should be written-off’?

A: I don’t think the Euro area creditors are prepared at this point to write-off debt. Greece doesn’t have a particularly strong hand at the moment. As I said they need to have that additional tranche of bailout finance to meet pension and civil service wages. So the Greek position is not one were they can say ‘you must write down our debt’. For the moment, the ball is in the court of the Euro area creditors. Now at a certain point, Greece’s position may be strengthened. However, when primary surpluses are in place for the fiscal position, official debt write downs do look more likely at that point.

Q: US is grappling with the fiscal cliff situation, after Barack Obama’s re-election as the President it seemed as if both the sides would work seriously for a deal. However, it is becoming clearer that even as November comes to an end, there has been little progress that has been made in the fiscal cliff talks. What are your views on that front?

A: We did expect that this process would be somewhat drawn out. We had an initial flurry of optimism when it seemed as if both sides were talking the same language. However, subsequently they have reverted back and we are seeing most of the confrontational approach. The deadline is December 31, the closer we get to that deadline without any resolution, the more nervous the markets are going to become that the fiscal cliff might end up being a reality. There has been some loose talk about triggering the fiscal cliff so that peoples’ hands are strengthened in the New Year. We hope that, that doesn’t happen because I think the short confidence globally across markets would be quite severe.