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Last Updated : May 18, 2012 06:59 PM IST | Source: CNBC-TV18

Greek exit could lead to global catastrophe: UBS AG

All asset classes in Europe particularly, the European indices and the euro have seen an incessant fall over the past few days on the back of endless Greek crisis. Stephane Deo, chief European economist, UBS AG told CNBC-TV 18 that Greece‘s exit from the eurozone would be extremely negative for both the Greek and European economy.


All asset classes in Europe particularly, the European indices and the euro have seen an incessant fall over the past few days on the back of endless Greek crisis. Stephane Deo, chief European economist, UBS AG told CNBC-TV 18 that Greece’s exit from the eurozone would be extremely negative for both the Greek and European economy.


“There is interest on both side in Greece and Europe to find an agreement and don’t let Greece get out,” he added.


According to Deo, the market has spilt view on Greece’s exit from the eurozone, but the market indeed is starting to realize that a Greek exit would be extremely difficult. He warns that Greek's exit could lead to a global catastrophe.


Below is the edited transcript of Deo’s interview with CNBC-TV18. Also watch the accompanying video.


Q: Earlier this week and perhaps up until last week people were glibly talking about the rest of the eurozone being more stable if Greece is actually allowed to exit. Is the market now changing its mind and discovering that an exit is going to be extremely messy, is that what we are seeing play out?


A: It has been the view since the beginning; today people are talking about the cost for the European taxpayer if Greece exits. We think that if Greece stays in euro it would have to restructure the debt. If Greece leaves the euro they would be unable to pay the debt.


So, instead of 60 billion euro for the European tax payer it will cost 155 billion euro. Our view since the beginning has been that if Greece leaves it could be extremely negative. So, there is interest on both side in Greece and Europe to find an agreement and don’t let Greece get out.


Q: Do you think there is a choice or whether policy makes can choose to keep Greece inside or do you think if Greece were to leave it could be a catastrophe and could lead to a sort of a Lehman moment in financial markets? Do you think it has that kind of potential or do you think there is still a possibility that Greece may go out, you could have major write downs, but it remains a possibility?


A: It is a possibility. We again believe that it would be very difficult to manage the consequences that, if there is really an impasse between the TROIKA and the Greek government, at some point Greece might choose to leave the euro. I will combat with the argument that it is very bad idea that Greek’s are doing something that is not rationale,


But its politicians decide to do it, they will do it. So it is not impossible, but the fact that it is possible does not mean that it would not be a catastrophe. I think it would be really bad for the Greek economy and also very bad for the European economy.


Q: Would you say that the chances of Greek exit have somewhat lessened since the previous few days as the market comes to terms with what it means for the others who have not exited?


A: The market is split. I talk to a lot of clients and you have all kinds of view. You have people looking at that and saying its obvious Greece will leave and half the people are saying Greece will stay. So, the opinion of the market is very volatile on that.


You show them the numbers and say look this is what will happen, they will not be able to repay this loan. When investors do their homework then they realize that the cost is so huge that it is not rationale. The probability has not changed much, but indeed the market is starting to realize that a Greek exit would be extremely difficult.


Q: What do you watch, do you just watch the lip movements of politicians or are there any parameters that you would watch out for, what should investors globally watch?


A: There is one thing you have to watch carefully; the Greek banks for the time have a negative capital because they took loss, so all the capital has been washed out. So, they need recapitalising.


There is USD 18 billion loan pending from the Europeans and should be paid in the next two days. If the Europeans pay that it means that the banking system in Greece is sound. It also means that the Europeans are still willing to have Greece. So, this is a very strong signal.


Q: Yesterday Charles Goodhart was telling us that perhaps the TROKA should only look at Greek banks and ensure that they are recapitalised, not pay anymore extra to the sovereign – that is the Greek sovereign but keep ensuring that the banks are capitalized. Do you think we would arrive at such a situation at all?

A: I would fully agree with Charles Goodhart. If we don’t recapitalize Greek banks somebody has to do it because the Greek government cannot print money. Only way for them to print money to recapitalise the banks is exit the euro. If you don’t recapitalise the bank they are forced to exit the euro. 

First Published on May 18, 2012 03:14 pm
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