Debt deal buys more time for Greece: Citi

In an interview to CNBC-TV18, Jurgen Michels of Citi expressed his views on Greece debt deal. The discussion revolved on whether this deal will be successful in resolving the nation’s long-term debt troubles or not an. In his view this deal is clearly buying more time for Greece.

Below is the edited transcript of his interview to CNBC-TV18 Q: We have had this deal. The markets are cheering it but the Euro-Dollar touched 1.30 and has retraced a bit. It looks like it was factored in. What next to watch out for? A: Most of what we saw yesterday night was discussed in the media before. They have spun very positive environment that they would reach a deal yesterday. So, there was something priced in there and a no deal would have been a big disappointment. However, this deal clearly buys Greece more time. It also shows that the other countries are willing to make further petitions into providing more support to Greece. That is for the time being, for the interest rate reduction and other measures. However, they are not willing to forgive any of the existing debt to Greece. In that respect the target now of debt-to-GDP ratio of below 110 percent by 2020 still looks very ambitious. Q: There was some statement that the European nations did indicate that they will do whatever it takes to help Greece until it is able to regain access to the capital markets. Would you read much into that statement? A: I think for the time being they are committed to go ahead and support Greece. However, we have also seen part of the statements still asking Greece to implement all the measures. We get the payments out in December and after that from January onwards. It is spread into three tranches.  It depends on fulfilling extra measures from the Greek side. The Greeks have delivered this time even with huge delays and lots of external pressure. It has to be seen if they continue to deliver the measures in the future. If it is not the case then we may see another view coming up from the euro countries. It will really be up not just on the willingness of the supporting countries, but mainly on the Greek side to implement what is requested for them in the next couple of years. With the empty support for the government it looks unlikely that Greece will be able to implement all those measures over time. Q: So what you are saying is every month we will revisit the edge of the precipice so to speak before that money is released? A: It is not just that money. I think there will be further funding in the future. They will come back on a regular basis and see how Greece is doing. I think in the next couple of months we will remain on this uncertainty. However, it is a big thing that actually the payments in December will be made. I think afterwards the deal will not secure Greece to stays in the Euro area. In our view Greece needs to continue delivering the measures. If they don’t do it, we’ll still see a high probability that Greece will leave the Euro area at some stage. This decision is unlikely to come up in the very near term. We have seen it is more likely to be taken off in the German election in September next year. Q: Most asset classes were subdued yesterday because of the Catalonian elections. Clearly the pro-independence parties have gained a majority. How do you see that? A: At the edge, there is more support of the extreme versions of parties, asking for independence in Catalonia. We don’t think there is a massive change in the position there. We don’t expect that there will be near term referendum on independence. Also there won’t be catalyst of negative news but in our view Spain remains fragile. The country will have to ask for external support at some stage. Looking at the economic situation with the ongoing deleveraging in the private sector, we don’t think that Spain comes back on a sustainable fiscal path. Also there is still significant amount of fiscal tightening required. We think that Spain will not get back on sustainable path with some form of debt restructuring. We expect that Spain and Italy will face some form of debt restructuring down the road. In 2015, we will most likely get a restructuring deal including maturity extension of public and private held debt from Spain and Italy. This will also include an Ireland plus a reduction in coupon payments. Q: For the more immediate term what does it look like that the risk appetite continues up until the end of the year you think? A: Many positions have to start closing there, the books are ready. So it is a question of what kind of events come through. I think the question is now more probably moving to the US and what happens there with the discussions on the fiscal cliff. I think on the European side we now have the Greek agreement. They will work this through in the next couple of weeks. However, we don’t expect massive amount of new news coming out of Europe.