Sell-off to continue; need clarity on Greece: Citi Pvt Bank

As each day goes by, the prospects of Greek leaving the Euro zone appear to be becoming higher and higher, says John Woods, managing director and chief investment strategist of Citi Private Bank.

According to him, markets are going to remain skittish and will continue to sell-off, until there is a better sense of stability and certainty and some forward clarity over Greece.

Also read: HSBC India says good time to enter mkt with long-term view

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Also watch the accompanying video.

Q: There is a lot of debate on the Eurobonds issue. Germany shooting it down, Sweden is shooting it down, and France seems interested. What resolution do you see on that front?

A: The challenge the Eurobond issue faces, at the moment, is that on one side it's a very popular prescription for burden sharing, particularly amongst the indebted nations in Spain, Italy, and France. But amongst the credited nations, specifically Germany, there is the view it would put off the sort of structural reform that is necessary to improve their fiscal position and such probably actually detract from a positive step forward. So, this is the challenge. It is certainly the case that momentum for Eurobonds is growing and voices calling for them are becoming louder. But for as long as Germany has this particular view about the socialisation of debt, I don't think it’s going to get much further.

Q: The market already seems to have started pricing in the risk of a Greek exit from Euro. Would you conceive that the probability of that event has increased quite a bit over the last week?

A: As each day goes by, the prospects, atleast from a market perspective, of Greek leaving the Euro zone, appear to be becoming higher and higher. Ofcourse there are formidable hurdles and formidable challenges facing Greece, if it were to do that. But it's been a long running sore in the side of the Euro zone for many years now I think there's a growing sense in the market that they would prefer Greece to either jump or remain, but firmly make its intentions clear either way.

Q: What are the events you are watching between now and June 17, the Greek election date? What do you think would be the real market moving events?

A: The main event, prior to the election, will be in Greece whether or not the run on the banks continues. If that is the case, what the larger implications on the Euro one banking system is going to be. Obviously, if we see people taking money out of deposits and perhaps sending them to safer countries in Germany, in the UK etc, that is going to be an issue because ofcourse Spanish banks require substantial amounts of money in terms of recapitalising. The last thing that they need at the moment is any risk what so ever of a run on their deposits.

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Q: Because of the situation and how it has evolved over the last 10 days, is the market beginning to expect another liquidity event in Europe along the lines of an LTRO (Long-term refinancing operations) again?

A: Yes. If you look at what’s called the basis swap between euros and dollars, which gives us an indication of the funding stresses the Euro zone banks face, is actually deteriorating. If it continues to deteriorate, I think the likelihood of an LTRO initiative is probably growing and probably necessary.

If that were the case, I suspect that the effect on risk assets would probably be limited in roughly the same they were in the previous LTRO initiative. So, I think this is sort of a diminishing return situation where although an LTRO initiative would be extremely positive for the banks, I am less convinced it will support and sustain a rally in risk assets

Q: Does that mean that the dollar continues to strengthen over the next few weeks as it has as other currencies depreciate because of risk off sentiment?

A: No, I think risk aversion will remain firmly off, until we get a better sense of stability and certainty and some forward clarity over Greece. For the time being, I know it sounds like a broken record that is shaping on risk appetite to the global markets. Until as I said that there is a firm sense of intent in terms of what they want to do, I think market is going to remain particularly skittish and will continue to sell-off.

Q: Where does that leave the rupee, one of the weakest currencies in the world over the last few weeks?

A: This is interesting about the Indian rupee because actually India has a reasonably domestic oriented economy. It is not so exposed to perhaps the external volatilities which have been experienced in many export oriented economies in Asia such as Taiwan or Korea.

The problem with the INR is ofcourse it's caught between a double whammy in the sense you do have that overlay of negative risk aversion at a global level. But at the same time, local investors, I think are looking at the domestic attractive opportunities in India and are voting with their feet and taking money out of the country.