Greece has no solution but 'extend and pretend': Macquarie

Latha: What is your sense, are markets still penciling in some kind of a deal either by June 30 or very soon?

A: I think the answer is market has no idea and that is why you have the volatility you have. Greece essentially has no solution, there is no solution that is possible and so what the market is looking for is at least temporary reprieve but nothing much more than that and that is why you have reactions the way you do. The basic principle that I think investors are failing to grasp is that it is not possible to deleverage any more for anyone, not just Greece, Eurozone, Japan, US or for any country.

So, from now on it is a question of continuing leveraging up rather than forcing deleveraging. So, whenever we have an episode where either the government or investors misread the situation and somehow trying to arrive at what they believe to be sustainable long-term outcome such as deleveraging, that is where you get severe bouts of volatility.

Reema: How do you see this play out, what could be the scope of the temporary resolution between the creditors in Greece and therefore how should the markets also read it?

A: The resolution is the same as it always has been – extend and pretend. That is not the similar to the way Chinese banks are extending and pretending, that is different. What Indian banks are doing and that is not different what we have everywhere globally. So, it is extend and pretend. The question is whether eurozone will actually push the envelope far enough to force deleveraging. Deleveraging means deflation, deflation means inability to grow nominal gross domestic product (GDP) and that requires elimination of surplus capacity whether it is too many service jobs or too many manufacturing jobs.

So, what Greece is, is an example of what can happen if you force deleveraging process. However, if you continue leveraging up there is no the end to the story, certainly not a good one. So, the challenge is, are you prepared to pay the price upfront in order to achieve a sustainable outcome or would you rather pretend and forget or try to forget? I think pretending and extending has always been the solution.

Latha: You expect that now, pushing the envelope is not your base case or any case at all for you?

A: Anywhere globally, Greece is not the only one.

Latha: Your point is that European Union pushing the envelope is an unlikely alternative?

A: It is, it always has been. Even a small change could create unpredictable outcomes and that is why Greece kept on insisting that they are not going to make any changes. In essence Greece should never have been part of eurozone, it probably should have never been part of European Union to begin with.

So, you are in a position that you are afraid of consequences; very similar to what happened to Lehman Brothers, very similar to what happened to in other occasions when you forced deleveraging. Therefore the chances are some kind of a pretend and extend will be found that gives you potentially temporary reprieve but exactly the same problem will reemerge in three to nine months time.

Latah: In the unlikely scenario that the European Union indeed pushes the envelope how will the Greek exit, I know we were talking in an extremely hypothetical scenario but how will things unravel? Will it be very ugly?

A: I think it will be good. I think it is going to be good for eurozone and it is going to be good for Greece because you can force a small scale deleveraging on some parts of the world. What you can’t force is the entire world to deleverage.

So, for example could Sweden deleverage in early 1990s? They could and they did. Could the entire world deleverage? Of course not; that is not possible, so, by focusing on one part you make eurozone stable and euro might appreciate, probably will appreciate as a result.

It is also better for Greece because Greece is not able to implement any meaningful structural reforms. If you are not able to re-implement structural reforms by not changing the currency exchange rates you are basically stuck forever. So, I think it is actually good for both, it is good for Greece and it is good for eurozone if they were to cut it loose.

Latha: As an emerging market investor which is largely our set of viewers, how should we look at the entire Greek episode since it is going to be with us for maybe a few weeks now at least. Will a dip engendered by this noise be used to buy if you are otherwise positive on the market?

A: As I said earlier, I think it will be good if they push the envelope for Greece as well as eurozone. So, long as people understand that you can only do it in a very specific set of circumstances that you should never try to replicate the same in other places.

So, for example you should never try to replicate to deleveraging of China ever unless you are prepared to rebuild the entire global economy on a different basis. So, I do think that if you are positive otherwise, it is an opportunity to buy.