Greece's pro-EU, anti-austerity stance is unrealistic: RBC

From the eye of the Greek storm Adam Cole, director and global-head, forex strategy, RBC Capital Markets spoke to CNBC-TV18 the EU and the ECB are trying to persuade Greece of abandoning the 'pro-EU, anti-austerity' stance as it was unrealistic.

He also draws attention to two criteria regarding Greece - the support of the anti-austerity parties and the developments in the Greek banking system on an perceived risk of an exit from the EU.

Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: What is the status of the currency market?

A: If the markets continue to put a higher probability on Greek exit then the risk is that it would be disruptive. The focus clearly is still very strongly on Greece and I think we will have to watch out for two things going forward. Firstly, how the opinion polls stack up ahead of the election that we assume takes place in the middle of June and whether the anti-austerity parties continue to gain extra support.

Secondly, the fact highlighted by the central bank governor about the developments in the Greek banking system as a result of the perceived risk of an exit from the euro.

So these are two criteria to watch. And if things continue to get worse in either of those respects, then the risk is that there will be further disruption and that spills over beyond the euro-dollar into risk appetite and price for assets and for other currencies.

Q: The euro-dollar at 1.268 today with the 52-week low at 1.262. Do you think some of what Greece may have to do has already been priced in or do you think Greece's exit will result in much lower levels?

A: Yes. If things continue to get worse and as best as we can fathom, we think the market currently attaches probability to Greek exit to around 40%.

That's double where it was ahead of the Greece election and the uncertainty that generated.

Could that go higher in the short-term? Certainly, I can see scenarios whereby it could and if it does then I think we will see the euro making new lows by a sizable margin.

Ultimately, I think 40% is probably still too high and my expectation is that the central scenario should still be that Greece doesn’t leave EU and ultimately we will see some of the risk being focused on unwinding.

But the problem for market short-term is that such small shift in the proportion of support for the various different Greek parties can result in an absolute sea change in the outlook.

So, certainly I can see scenarios where that probability rises to almost 80% and with it short pulling the euro dollar. It’s one of those things that are very difficult to trade, because we are talking about a small probability for catastrophic events and necessarily those things are hard to trade in foreign exchange markets.

Q: A poll in Greece says that a majority of the Greeks want to stick with the austerity plan. Would things like this ameliorate the situation? Do you expect the ECB to swing into action by buying bonds for other sovereign bonds?

A: The problem here is that the anti-austerity and pro EU parties are playing to populist support which is very much along those lines. Greeks populist support is very much for staying in the EU, but against austerity.

The problem is of course, whilst that makes for a good populist platform to stand on, the two for most people it would be mutually incompatible for Greece to stay within EU it needs to stick to the existing austerity plan.

So, much depends how the debate crystallises in what is likely to be a month-long election campaign and whether there will be continued support for the two-pronged policy that is mutually incompatible.

That ultimately will be what swings Greece one way or the other, whether you get the pro-EU support crystallising into pro-bailout support and which is the more optimistic scenario.

As far as the ECB is concerned I think we are probably some way from that yet. Certainly the ECB still has policy options, it could reenact its European government bond purchases, it could further inject liquidity and you will continue to see the ECB signaling that those options are open and if need be, it will use them.

I don’t think we are at the point where it will do so yet, but certainly in those senses these are the policy options for the ECB.

Q: In case the Syriza Party comes to power and adopts a tough stance, do you think Europe will do something to alleviate the situation in Greece?

A: I think the initial stages that what we are seeing already is that the international community and European community in particular is trying to force the debate to become more realistic.

So the international community, various ECB officials and some politicians in Europe are trying to highlight the inconsistency of being pro-EU and anti-bailout as Greece heads into the election.

If that’s not possible and we do see Syriza coming through as the largest party continuing to push the line of being pro-EU anti-bailout, then ultimately the risk is the only way that that plays out is through Greece exiting and that risk is still material.

But as I say it’s a structural shift in the share of the votes for the individual parties in Greece, because voters are definitely spread across many parties. Thus a few percentage-points shift in the share of the vote can have a very material impact on the outlook for having the ultimate result itself.

So, the next few months are going to be one of absolute and maximum uncertainty.