Greece debt deal: See implementation risk, says Rabobank

Euro zone finance ministers and the International Monetary Fund clinched agreement on a new debt target for Greece on Monday.

In an interview to CNBC-TV18, Adrian Foster, Rabobank says there is some progress in Europe, but not to get to carried away. "European leaders are flagging this is a milestone in the Greek situation. They have done that twice in the past. There have been two other milestones that we can look back to," he adds. According to him, the devil is not so much in the data, but in the implementation. "That is still a risk. I think investors would be a bit foolish to ignore that risk," he adds. Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Q: Do you think that we are going to see a significant amount of risk coming on? There seems to be a fairly emphatic declaration of support by the European powers to Greece. Are we going to see a little bit more of this risk-on rally stretch? A: I do think there is a firm tone to markets off-late. It should continue. There is some progress in Europe, but not to get to carried away. European leaders are flagging this is a milestone in the Greek situation. They have done that twice in the past. There have been two other milestones that we can look back to. So, in that sense, the devil is not so much in the data, but I guess in the implementation. That is still a risk out there. I think investors would be a bit foolish to ignore that risk. We are two-and-a-half years into this Greek situation now. Are there any meaningful surprises to come out of Greece? I doubt it. I think people who are holding Greek debt are pretty aware about the risk profile there is. So, I do not see Greece as a big systemic problem that can blow up on the European scene again the way it did through the last 12 months or so. Q: We saw the euro intermittently go to around 1.30, but there has not been a runaway rally in Asian equities. What is the reaction attributed to? Is it the fact that it is already factored in that maybe a Greek deal was on the cards any which way? Is it possibility that like you mentioned implementation would be one of the key things that they would watch out for? A: Yes, it is perhaps a combination of the two issues. Ofcourse, the Greek situation has lingered on for a long time. So, people are rightly a little bit cynical about the implementation risk. But as I said we are two-and-a-half years into the situation now. I do not think there are too many systemic surprises to come out of Greece now. So, in that sense, I do not think it is an issue which will blow up on the Euro zone again to anywhere near the extent that it did. I think the banking system exposure to Greece is well known and again it is not of systemic proportion anymore. But I guess it is a reminder of some of the longer term issues. That is particularly when we look to Spain. On the optimistic side, you could point to the Spanish banking system holding onto some of this LTRO liquidity from the ECB. That is costing them 0.75 percent now. They are quite likely investing in Spanish government bonds at around about 5-5.5 percent. So, there is a positive carry which they are slowly using to recapitalise is my guess. So in that sense the longer it drags on the better it gets, but there are clearly still risks around Spain and perhaps our timeframe for those risks to really be on the radar screen is the next three months. The first couple of months into the end of February pretty much of 2013. _PAGEBREAK_ Q: What are you recommending buying in terms of your top three asset classes globally? Would it be Organisation for Economic Co-operation and Development (OECD) countries equities? Would it be emerging market equities? Would it be equities at all? A: Certainly, it would be some equities. But I think just standing back and looking at asset classes really through the last two years and increasingly so through that period, there has been a very high correlation between risk currencies versus the US dollar, peripheral government bonds in Europe and indeed equities across the spectrum including across the emerging developing world, particularly in Asia. So, they are very highly correlated. It is hard to pick out three different ones with different characteristics. I think the investors are very much onboard for the same ride regardless of the asset classes that they are involved in. Our core thought on Europe, for last couple of months, has been that Europe does indeed have the wherewithal to hold it together. Periodically we are going to get to these periods, when we seem to be looking over the precipices. There is going to be real question marks raised over the willingness of governments to hold it altogether, but ultimately they will do so. I think the last couple of days is another example of that. Ofcourse we have seen quite a healthy risk rally in advance to that. So, I am going to put the risk rally from last week in anticipation of the outcome and perhaps not too positive on too much more residual upside across asset classes in the immediate aftermath. Q: One asset class, which stood out for not having benefitted much from even this risk appetite, has been the rupee. What is your view there? Are you going to see major downsides in the rupee? A: Yes, I think up until probably about three months ago, rupee was very much a bellwether for the international financial landscape. When European tensions escalated, the rupee weakened. When European tensions calmed, the rupee strengthened. That has been overtaken a little bit with the domestic focus more recently. The range of reforms announced by the government only a couple of months ago, multi-brand retail was of course one of them. I think that did capture investor imagination, investor attention, and certainly corresponding with a healthy rise in the rupee. Now, I think investor is perhaps a little bit more to being on the jaded side and wondering whether these reforms will indeed be implemented and put through Parliament successfully. So, I think investors are a little bit cautious on that front and very much with the domestic focus on the policy landscape in India. Q: We have 34 days up till some sort of resolution with regards to the fiscal cliff. How do you think markets are possibly going to trade in the next 34 days? Where do you think emerging market stand vis-à-vis the US markets in light of the fiscal cliff negotiations? A: I think investors are sufficiently jaded by the experience over the last couple of years that they are going to be worried about this fiscal cliff issue. There are two points. If you look beyond or below the federal government, this fiscal cliff issue is a federal government issue. State and local governments have already fallen over the fiscal cliff, they did so a couple of years ago. They have shed half a million workers in the last three years. They have actually largely cleaned house on our take. They are back to tentatively reemploying. So, there is an offset against the fiscal cliff, if indeed it does pan out to its full extent. Then you look at the federal government, the political landscape there, it is very hard to see that when push comes to shove, either side of politics has an incentive to let this go over the cliff. So, we are still of the view that there will be deals done, there will be a bit of a downdraft on the economy from this fiscal tightening. But it is not going to be anything at the scale of the sort of 3-5 percent of GDP, if you like the more pessimistic claims.