Greece can ruin European recovery; China events imp: Citi

Below is the verbatim transcript of Willem H Buiter's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: You were confident when we spoke to you late last week that Grexit does not really exist as an option. What is your take now? Will Europe be conciliatory?

A: It certainly always existed as an option. I did not think it was the most likely outcome when I last talked to you about the meeting held. The outcome of the referendum, the overwhelming no vote in response to the latest official proposal of the European plus International Monetary Fund (IMF) institutions to Greece has raised the risk of a disastrous outcome materially. I still think there are many ways in which the Greek dilemma could play out, but definitely the rejection of anything that has been offered by the international creditors and the sense of triumphalism that he has shown them and democracy has overruled finance. If that really takes hold, it will be very dangerous because Greece, even if it were given what it asks for which is general debt forgiveness needs massive addition of financing which I cannot see forthcoming from the international community, international creditors in the absence of any solid track record of delivering on commitments to the form.

I think at the moment things are very precariously poised. The sense of euphoria in Greece will last maybe a day and after that the reality of bank closures, inability to withdraw deposits from banks, inability to go to the ATM and get cash out, that will take over.

Sonia: That's about Greece and the impact there, but how high is the probability of a systemic global risk in your mind in the event of a potential Grexit?

A: Grexit itself - financial consequences are manageable by the European Central Banks and the instance it has at its disposal everything from outright monetary transactions, quantitative easing, routine or enlarged funding of banks who collateralised, repurchase operations, the whole range of lender of last resort operations to the banks and through the back door lender of last resort operations to sovereign periphery. All that will make sure that no sovereign or no systemic important financial institution will be forced in to unwarranted insolvency, even if Greece were to go completely wrong. That is clearly a dysfunctional outcome of the Greek crises in which there is a third of sovereign debt default in Greece first to other official creditors then perhaps the private creditors and ultimately perhaps leading to Grexit would do financial damage. Either it would not be something like a financial catastrophe.

I personally consider what is going on in China from a global perspective rather more important than what is going on in Greece. But Greece can ruin the European recovery if we do not get a settlement that provides debt relief to Greece in exchange for serious structural reforms by Greece that permitted to a resume growth n a way that will ultimately eliminate its dependence on the rest of the Eurozone for funding. They are nowhere near there yet and this referendum is in many was a big step backwards.

Latha: The IMF on Friday put out a note indicating the gravity of the situation saying that even if they got a 20 year moratorium and 40 years to repay, it looks like they are going to keep paying till 2057 and more importantly, even if you assume the one percent GDP growth, even then that is the long-term Greek growth which is not there for the last five years. Greece would still be running a debt GDP over 100 percent for the next three decades. Considering the mammoth problem and also the first voices that have come from both, Hollande and Merkel in particular have been conciliatory. They have just said that we will respect the referendum and they are meeting on Tuesday. Does this give you the sense that there is conciliation or does it give you the sense that there is more chaos?

A: Clearly, nobody wants a disastrous outcome here. Mr Tsipras, the Prime Minister of Greece, was conciliatory in his previous statements in his post referendum public statements. So, this is Merkel and Francois Hollande, the French president. But, this is not enough. The fundamental positions of Germany, a number of other countries among the creditors, the Netherlands, Finland, Estonia and even some of the other periphery countries that has done the hard work and do not want Greece to get reward for, in some sense, not doing the reforms but they at some cost to themselves, did implement. Spain, Portugal, Ireland, Italy, these countries are definitely not willing to make the kind of concessions on debt restructuring. Basically, most of the Greek sovereign debt help official creditors writing it off, they are not ready for that. At the same time Greece has proven itself security incapable of instituting the kind of structural reforms that will stimulate growth. Labour market reforms, product market reform, privatisation, opening up the service sector, opening up professions, all these, almost emerging market features that make Greece almost an anomaly in the European Union, unwilling or unable to reform. So, both sides have something going for them, they are willing to talk again. But, unless the creditors make deep concessions on debt write down, and Greece for the first time in its history, makes serious reforms, this will not end well.

Sonia: Just one final comment from your end because all the viewers watching our show today are most concerned about what the impact could be on distant economies like India. In that sense, India has bolstered its own defences with high amount of Foreign Exchange (Forex) to manage any kind of meltdown. So, do you think that India will be quite insulated from this entire Greek episode?

A: I definitely think that given the exterior professional management of monetary policy in India, given the more than adequate management of fiscal policy and given the response of the Indian authorities to the near accident in June, 2013 when there was a hint of the end of dollar quantitative easing, India will be very little affected by the global fallout of the Greek crises. Clearly, if Europe as a result of this crisis goes through a slowdown, then it ultimately through trade channels, India will be affected. But, the direct and disastrous financial market transmission resulting in sharp depreciation of the rupee, spike in rupee interest rates, collapse of the stock market, none of that seems likely given the record of management since the near crises in middle of 2013.