There could be deep & serious recession in Europe: HSBC

In an interview to CNBC-TV18, Kevin Logan, US economist at HSBC says, investors are worried that the situation in Europe is going to deteriorate further. “The problem is there could be a very deep and serious recession in Europe. That in-turn will affect the global economy,” he adds.

He doesn’t think there will be a QE3 in the near-term in US. “We are basically seeing a moderate level of growth, waffling up and down around 2%. As long as that continues, the Fed will be satisfied, particularly since the rate of inflation has moved up,” he asserts. Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Reema Tendulkar. Also watch the accompanying video. Q: You have visited Tokyo. You are now in India for the past few days. What is it that you have picked up? How is the macroeconomic picture looking with particular reference to Europe? What’s happening with Spain now and how it will impact? A: There is a lot concern in all the cities I visited. Investors are worried that the situation in Europe is going to deteriorate further. A year ago, the crisis was getting acute and they thought the solution when they restructured the Greek debt. Here we find ourselves a year later and the crises are not gone away. It seems to be getting worse not better. The problem is there could be a very deep and serious recession in Europe. That in-turn will affect the global economy. Q: What end would you approach this fear of recession from the Euro zone with? Do you think it is going to be a deterioration in economic growth, that is going to trigger it off or do you fear there is going to be a financial blow up something that we saw happened with Lehman which may then precipitate a recession like environment for the entire euro-zone? A: It is a financial blow up. There is already recession in a few European countries like Spain, Italy, and Greece. But the problem with this growing recession is the financial instability. The losses on assets in these economies are going to affect the banking system. As bank losses mount, they need to be rescued or bailed out by the government. The government themselves are under stress. So, when markets look at this, they say where the solution is. The problem seems to be growing bigger than the government can handle it. So, they need a PAN European solution. Unfortunately, the European partners haven’t agreed on how to go about doing that. Where is the solution? It is not apparent. Therefore, people are backing away; investors are backing away from Europe. That just intensifies the problem, the governments like Spain or Greece or Italy where the interest rates on their debt keep climbing. Q: In that regard, would you say the currency market has been far more accurate barometer of events in the Euro zone? Would you expect to see more weakness both on the euro and as a spillover in Asian currencies? A: Yes, there appears to be a trend at the moment. Without resolution, global investors will continue to back away from the risk that they see in Europe. As they do that they will move out of euro based assets into others.  Having said that, the yield on US securities formed to record low levels. So, the cost of safety is going up to get out of Europe into US treasuries, people sacrificing yields, but they are gaining liquidity in safety. But without a solution soon, I think we will continue to see the euro deteriorate. _PAGEBREAK_ Q: With respect to the US economy, the couple of data points that we have got have shown some sort of an improvement in the past few months. How is the US economy picture looking? Will there be a need for QE3 now? A: I do not think there will be a QE3 in the near-term. The economy is growing at a very modest pace, it’s about 2%. We have seen a bit of strength earlier in the year, a bit more weakness and then now little bit of a pick-up. We are basically seeing a moderate level of growth, waffling up and down around 2%. As long as that continues, the Fed will be satisfied, particularly since the rate of inflation has moved up. Early in the year it was dropping below 1%, they were concerned about that. Consequently, they provided more monetary easing via forward guidance. They won’t raise rates till late in 2014. Now the rate of inflation is a bit higher, so they are a little more comfortable with the situation, they don’t feel any pressure right now for QE3. Q: One if Greece exits and second if there is a contingent effect and Spain as well goes under the boiler now, what is the impact that will have on the US economy? A: It will mostly come through the financial markets. If we have this type of scenario unfolding in Europe, asset prices move fast. The stock market in particular will decline and then US corporations that have business in Europe are the big corporations with extensive operations and sales, they will start to lose money on those operations. That will affect their stock valuations in America. We will see decline in the US stock market, that will affect wealth and confidence. So, the spillover will come via the financial markets.