Final act in Greek tragedy; exit inevitable: Lloyds Bank

Greece’s fate as part of the eurozone group of countries may finally be coming to an end after voters rejected roundly rejected austerity measures. Greece’s membership in the eurozone is expected to come to an end before the year is out, sending global markets and the euro tumbling.

Trevor Williams - chief economist, Lloyds Bank believes that this is the final act in the Greek tragedy playing out in the eurozone and he is a 100% sure that an exit is on the cards sooner rather than later. “Staying in the Euro means they have to accept cuts of 40-60% in living standards which is leading to social problems already.”

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: Is this the final act in the Greek tragedy? Are we now seeing the early signs of a Greek exit that might take place by the end of this calendar year or at least by the first quarter of next year?

A: We have been saying for quite a sometime that we always thought that Greece would leave the Euro since the crisis in the financial markets broke three years ago and the pressures that brought in to all of those countries that have big debt problems that will require devaluation in order to get over them.

I don’t think if the new Pasok and the other center-right parties were to get together this would change. The math is simple. Greece needs a big devaluation in order to make their economy more competitive. Staying in the Euro means they have to accept cuts of 40-60% in living standards which is leading to social problems already. So, I think that a Greek exit is inevitable.

I wouldn’t even give it a 50-75%; I would give it a 100%. It could even occur possibly as soon as the next election. I remember that is due 10th-17th of next month. If it returns the same kind of result that we see now and I can’t for the life of me quite see why it should return a different result, why would they go back to the former parties. Even if they went back to the former parties and they negotiated some slight amendments to the treaty it still wouldn’t make any difference because the effects of the austerity package that they have agreed to is so great that socially it is just unacceptable and we are beginning to see that.

Q: You are more alarmist than I had anticipated. You expect that Greek exit will come in probably the next two months. What happens then to the European financial system, to the European equity markets and to the Euro?

A: It could happen as soon as the next couple of months, unquestionably. That is a huge possibility. Clearly, this could drag on for rather longer. It has dragged on this far after all. This possibly can linger in the system for a bit longer yet. But I don’t agree that it’s a doom’s day scenario for the Euro.

Actually what’s required to solve part of the problems with the eurozone, for those economies that cannot maintain membership because they are unable to be as competitive as some of the countries that they are locked into a single currency with, for their own future, for the future prosperity of the next generation, they have to get their financial and economic house in order and to do that they have to leave. The quicker it happens, the better for them and the better for the Euro.

So, actually it will solve some of the market issues around uncertainty about what happens next, they know what happening next. The weaker members leave, stronger members stay in and the adjustment process for those that stay within the Euro.

Q: Would you factor in some near-term chaos as a result of this exit because it is going to put a considerable amount of pressure on those banks in Europe that hold Greek debt not just Greek banks, what that means for yields across Europe, financial markets going into a panic. Are you saying that in the next six months we could see a considerable amount of panic build up in Europe.

A: I would pose a question to you which is - aren’t financial markets really pricing in the expectation that Greece leaves? Who seriously thinks that they are going to stay in? Have they not already factored this into their actions? Have they not already taken this into account in their expectations of what happens to the value of the euro?

Q: How will banks react to Greek going back to the drachma? What will it mean for the Greek bonds that they hold on their books? We are already seeing considerable strain on Spains’ banks. How is Europe’s banking system going to respond to this?

A: They already expect this to happen. I think those who have not already sold down their Greek sovereign debt should have done so and it shouldn’t be a complete shock to them if it does happen because to me they must be – I don’t want to say blind but I think the events that are occurring around this big issue are such that everyone knows that this is occurring. So I think that it’s well priced in.

I think that some of the money that’s currently being spent in Europe to try and keep Greece within a system that it cannot maintain, some of that money will be better spent ensuring that the aftershocks in terms of any impact on the banking sector delinquency rates, money should be better spent on managing that than trying to keep Greece within the euro. That’s money well spent. Currently I don’t think they are spending the money well.

Q: We have had deteriorating news come in from Spain's banking sector as well and that could be a bigger blow to the eurozone as well as to the currency. How bad is the crisis is in Spain at this point in time?

A: Of course it is a bad crisis for Spain. Let us go in the order of magnitude. Spain is roughly 12% of the eurozone, Greece is about 2%. So obviously the magnitude of Spain is a lot greater but by sheer dent of the fact that Spain is a bigger economy, it has more ability to withstand some of the pressures caused by being in the Euro. It clearly means big challenges for some of their banks.

I think the authorities have to create good bank, bad bank, they have to bail out organisations that can't stay in the competitive environment that is implied by the sharp declines that have occurred in property prices and the defaults that there are in their book should be recognised and should be backed by the state where possible. I think they should shut some of them down, get them taken over by other firms if that's the best option.

Spain is a big enough economy, strong enough, has enough potential to reform in a way that Greece doesn't for it to be able to weather this storm. Some of the changes that are being currently forced on Spain will actually make their economy more competitive in the long run and it's a good thing to the extent that some of this shock causes them to take tough decisions that they should have taken early when they joined the Euro rather than now in a crisis situation. Overall, they can weather the storm and Spain does not have to leave the Euro.

Q: We have seen the euro crack below that 1.30 mark. Many people over the last two years have called for parity with the dollar. How much weaker do you see the euro get?

A: In an uncontrolled exit of currencies from the Euro, then the euro could fall to parity, actually I think it could fall to less than parity. I actually think it could fall towards 0.86 or 0.90 against the US dollar in a crisis situation where the Euro starts to break up in a disorderly way.

However, a controlled breakup is possible. I think that the euro in that situation could fall towards euro 1.20 or just below but I don't see why it should break up in an uncontrolled way. I think that weaker currencies leaving the Euro eventually will strengthen it and not weaken it.