Markets' fall finds level; Greek calm is scary: Stewart

In his analysis of the economic scenario on CNBC-TV18, Justin Urquhart Stewart of Seven Investments points out to the fact that the European markets have refused to free-fall on news of another possible crisis brewing in Spain.

Stewart emphasises that though Greeks might vote to stay in the EU, the country does not have the money to stage a rescue and requires German aid in the form euro bonds. Below is an edited transcript of the interview on CNBC-TV18.  Also watch the accompanying video. Q: European equities had a decent 1% rally on Tuesday, but the news-flow wasn’t too supportive. On Monday there was negative news from Spain regarding borrowing costs among other things. What led to this rally?
A: Though the rally was good to start with, but it ebbed away when the reality of the Spanish costs or debt rising leading up to another euro zone crisis seeped in and washed away investors' confidence.
But instead of being numbed into submission, what is remarkable is that the market is holding and prices aren't actually falling any further. But there is the lack of confidence.
So, the markets are within a sort of trading range, but the question is whether Spain can start sort out its banking system? Will banks be allowed to go under?
Though the Spanish authorities provide indications of  resolving the crisis, that still does not answer how the bailout will be financed as they don't have the assets to be able to do so. Q: How are investors viewing the entire European equity market given the turmoil in Greece and now Spain?
A: It's interesting that prices are not falling that much because one has to compare the indices with the contents of those indices. The underlying companies that stick to their larger cap counterparts in say, the DAX in Germany or the CAC in France, are very strong, good companies.
While the market is being pulled downwards, by inability of credible political policies and leadership, it has stopped falling at a certain level and this is where a trading range is being witnessed.
_PAGEBREAK_
So when active traders at the bottom of this range go and buy one of the tracker funds like Euro stocks and then sell it, it sends the market further up. For longer-term investors this actually will provide an opportunity. This trend is set to increase all through summer in Europe.
The sudden downward lurches will be a good time to pick up assets as investors start to believe that the market will eventually sort itself out. Q: What's the view forming on Greece right now? There have been reports that the new Democracy party has emerged as the biggest party in the six opinion polls. Do you think there could be some positive news on the political front in Greece before the elections in June 17?
A: You are absolutely right. The middle parties in Greece are now getting a little bit more confident with people beginning to view the polls as a referendum on the EU itself and not just about the debt policy.
But the problem is even if they do vote for it, they still can't pay for it because remember what all the other main EU  leaders said 'We want Greece in so long as they actually go along and play by the rules'. And of course, they can’t play by the rules because they haven't got the money.
So, even if they do get elected I still think that it is inevitable that will have to be significant restructuring resulting in some form of local currency because the current mechanism just isn’t going to be able to work.
There is another way and that would be if Germany does finally relent and start allowing some form of euro bond, but they are very firmly against that at the moment. Q: How high are the fears currently in the markets on a run on various banks in Greece or Spain and that resulting in a financial blowup?
A: You are quite right on this. The amount of money coming out of those banks, it's not quite a run yet, but we have been seeing figures of 100 million euros coming out of Greece as the Greeks quite understandably put their money elsewhere because they don't trust their banks.
You could only carry on doing that for sometime after which, of course, you run out of money. Your are not going to get any notices when the banking crisis would hit Greece.
What will happen is there will be announcements from the government suspending banking transactions and a sort of financial martial law will be imposed.
I fear to say that actually we are quite close to that now. So don't be fooled by the quietness of the moment and the feeling that maybe things are sorting themselves out.
They are not. Things are still deteriorating and I think actually in the background, people are preparing themselves for a complete restructuring and maybe a suspension of their membership from the Euro zone.