European markets look stable now, says Lakefield Partners

In an interview to CNBC-TV18, Bruno Verstrate, chief executive officer of Lakefield Partners says, the European markets are quite relaxed because there is not much news flowing into the markets at this stage. "That will change, when the German court tells the world on how they see the EFSF and the ESM as legal or illegal into helping the peripheral countries. If the court decides that it is illegal, then it will be all risk-off again," he adds.

At this stage, he says, there is not too much news that could unsettle the markets.

Below is the edited transcript of his interview with CNBC-TV18’s Latha Venkatesh and Gautam Broker.

Q: The markets look pretty gung-ho. We are getting contradictory statements from Germany and from the European Central Bank. What is making the markets elated about the meetings and ECB action later on in the week?

A: At this stage, the market is quite relaxed because there is not much news flowing into the markets at this stage. That will change, when the German court tells the world on how they see the EFSF (European Financial Stability Facility) and the ESM (European Stability Mechanism) as legal or illegal into helping the peripheral countries.  If the court decides that it is illegal, then it will be all risk-off again.

At this stage, running into that event everyone seems to be pretty relaxed about it. That might change a bit in the week before the court case is decided, the week of September 12. Before that, I think this is just business as usual. It is a bit risk-on, the results were quite good and lower euro is helping the European exporters quite a bit. As such there is not too much news that could unsettle the markets.

Q: What about the Der Spiegel report in Germany and the ECB clarification to that? ECB said that it is individual views and it is wrong to speculate on the shape of future ECB decisions, but it has not denied exactly what the report had to say. Do you think there is still hope alive in the market that the ECB is going to mull on something like capping spreads in the periphery?

A: In the end, it will have to because this is not the long-term solution, but atleast it will not make the problem grow faster. If they cannot do that, it will be extremely negative for Spain and Italy. That is something that even Germany cannot afford itself.

In order to say yes go ahead, you have the mandate, there is a bit of legal thing that need to be changed. There is going to be some political special tricks to be applied. That is probably the reason why at one stage Angela Merkel this week said, it is a good plan. They are already doing it because legally speaking, they cannot do it yet. There as well they are waiting for the German court to decide on yes or no because Germany clearly keeps the key in its hands on the future.

Q: There has been a divergence in what Angela Merkel has been saying and what the Bundesbank has been saying. Bundesbank as usual has continuously denied any kind of support to ECB’s moves on bond buying. On the other hand, Angela Merkel saying that she is supportive of what the ECB is thinking. Do you think it will finally boil down to what Angela Merkel thinks and not what the Bundesbank wants?

A: In the long-term, it is going to boil down to democracy. If Angela Merkel is not re-elected, that is going to be the end of what she is saying. On the other hand what the Bundesbank is saying might be correct on a long-term view and long-term fear, almost frantic fear of inflation. If the economic numbers clearly show that inflation is not an issue, even on the contrary that deflation would become an issue then they have no right to speak anymore either.

Q: Do you think the market has factored in the possibility of the German court declaring that the ESM is not constitutionally valid? That would be a huge negative, isn’t it? The markets don’t seem to be preparing for it at all?

A: Underneath, they are preparing. That still shows visibly in the yields that Italy and Germany and Spain are paying at this stage. So, the emergency plans are ready, but it makes more sense to already apply them, if it is not applicable yet. It would be extremely negative for the markets. It would probably mean Germany pulling out of the euro. It could have many consequences.