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Chances of Grexit higher, bullish India among EMs: Parsons

All eyes are on Europe as the Eurozone Finance Minsters meet in Brussels to discuss Greece’s dwindling finances. Nick Parsons, head of research of UK & Europe at National Australia Bank, said there is not much expectation about the deal, which is also being reflected in the currency market.

He sees a higher chance of Greece exit as the rest of Europe feels that it could cope with considering that its financial system is vulnerable to shocks which it may produce.

Discussing emerging markets, Parson holds a bullish view on India. He expects the country’s outperformance to continue in near term. On his expectations from the upcoming Budget, he said the key would be not disturbing the policies on FDI and inward investments

Below is the transcript of Nick Parsons’ interview with CNBC-TV18’s Menaka Doshi and Anuj Singhal.

Anuj: What is the assumption that market men are making right now about this meeting today?

A: It has been a very quiet start to the European session. If you look at currency markets, we have been trading in less than 0.5 cent range for the last 10 hours. So, through the Asian time zone, through your time zone and into early Europe just 40 bps have traded in the Euro-Dollar pair. So, that really tells you that there is not a great deal of expectation one way or another that there will be a deal.

Essentially if you want to take the negative spin for today you will say that we are going to see the creditors taking a much harder line in their negotiations, by the creditors we mean Germany, Austria, Netherlands, Finland and others.

However if you want to be little bit more optimistic you would say probably there is going to be a deal at some point even if not today and you will remember that as Angela Merkel said last Thursday night Europe has always been based on compromise. So, what we are seeing in European markets today is these two factors pretty much offsetting themselves. Currency markets are quiet, equity markets very little changed in Europe today.

Menaka: It does seem that Greece is likely to run out of money by the end of this month, that is when the bailout funds run out. So, time is running out for everybody involved in this resolution process. What if we don’t find a resolution between now and February as the worst-case scenario, what does that mean, do we see tumult in the credit market, do we see tumult in the currency markets, is that a potential harbinger of an exit by Greece?

A: Yes, it would be. Let us remind ourselves that Greece’s external debt is 175 percent of Gross Domestic Product (GDP). This currently had bailout funds of around 320 billion euro. So these are substantial sums of money that we are talking about and if you were formally to default on those either because of own unwillingness to continue in a program or because of the creditors’ unwillingness to extend it further monies then we would be seeing quite a dramatic move. It would be the start of a Greek exit from the single European currency and the fallout from that is unlikely to be limited to Greece in the first instance. Most especially you will be thinking that the markets of Spain and Portugal will come under pressure. And so initially with the euro but if you are sitting in Frankfurt or Helsinki or Vienna then you are taking the view right now that the European institutions are better able to cope with the Greek exit and the fallout actually might not be dramatic as it would have been, say, two years ago in 2012 when Mr Draghi pledged that he would do whatever it takes. So, depending on where you are sitting there are very different scales of threat to financial market.

Menaka: What are the changes of a Greek exit? I was reading one Barclays report that seemed to say that the chances are higher than they were two-and-a-half years ago?

A: Chances probably are higher simply because Europe feels better insulated. The rest of Europe feel that it could cope with a Greek exit and that its financial system is vulnerable to the shocks which it would produce because what has happened over the last two years is that the Greek debt has been transferred from the balance sheets of French and German banks on to that of ECB. So, therefore the private banking system is more able to withstand the shock and the losses would be felt by the ECB. The view is, that might have less of an impact on the real economy, on the financial economy than it would have done two years ago. So, that is essentially why the transmission mechanism might be a bit different this time around.

Menaka: Do you expect that the ECB would have to respond to a potential Greek exit from the eurozone in sort of using some more unconventional methods?

A: The ECB is currently supporting Greece by what is known as Emergency Liquidity Assistance (ELA). That is going to be reviewed every two weeks. I would be very surprised if the ECB took the decision to cut that off because that would be essentially a political decision and the ECB is supposed to be apolitical.

Menaka: Just two weeks ago we saw the European Central Bank (ECB) say that Greek debt would no longer work as collateral. So it did make a political move in that sense already. So are we discounting the chances of yet another political move from the ECB?

A: That was just part of normal negotiations and I thought the move two weeks ago was over-interpreted.

Menaka: We are also trying to understand what all of this means for funds to emerging markets and to countries like India. Between now and whenever some sort of compromise is struck or if one is not struck and potential Greek exit is then in play what impact you think that will have to fund flow to countries like India?

A: One thing that we have always noticed around Indian markets has been their resilience not just through the last year but also into this early part of 2015. If you look we are only six weeks into the year, we are at the start of week seven and already the Indian market is up six percent. So India still stands out as a standout destination amongst emerging markets and we are almost at the point of saying it has emerged rather than being categorised where it is. So, India is resilient, the currency has done remarkably well in the face of a strengthening US dollar, and I expect the outperformance to continue over medium term. There are no concerns being expressed to us by international investors around the near-term outlook for India, they all seem very relaxed about it.

Menaka: Could one argue that the flows into India might in fact even sort of improve or exceed if Europe is thrown into or thrown out of gear or thrown into trouble of dealing with the Greece exit?

A: That might be a little bit of an exaggeration but overall I would prefer to use the word resilient because it has been able to shrug off – the markets and the currency in India have been able to shrug off bouts of bad news previously. If we were to go back to the start of December even before the Greek elections were announced, we had those three rounds of voting, at the start of December the rupee was trading at 62 to the US dollar. We had three failed rounds of elections, we had a change of government, we have had a generally strong US dollar and here is the rupee trading at 62.17, it has barely budged from where it was at the beginning of December and that tells you all that you need to know.

Anuj: In the very short to near term is there a point that, not on India but there could be pressure on some of the other emerging markets and because of which there could be a sentiment impact. So, what I am trying to guess is that will rest of the Asian markets react a bit negatively if something like Greek exit has to take place?

A: What I was trying to make the point there was about relative value, saying that India relatively is pretty resilient. If you look in absolute terms emerging market as a whole is down from where it was in the third week of January. We are only off around 1.5-2 percent but there is just a feeling at the moment that says let us take a more of a wait and see attitude. Cash is pilling up, cash is ready to be put to work but as long as we have this uncertainty around what it might mean for peripheral markets in Europe and markets which are not the mainstream of the developed markets, I think what we are going to see is essentially treading water. However if and when Greece is resolved and it is reasonable to assume it will be then I think that will be the key for risk to be more readily assumed by global fund managers.

Menaka: Do you have expectations from the Budget that is around the corner here in India and how you expect the equity markets will move from hereon?

A: The important thing is that foreign direct investment and inward investment is not deterred and that is the key. As long as the Budget doesn’t have any proposals that would potentially deter foreign investment then that really is realistically all that investors internationally are hoping for.

We have seen some liberalisation, we have seen some opening up over the course of the last 18-24 months and as long as there is nothing to interrupt that trend and to really provide any immediate negative surprises then investors are going to be very relaxed. They are less concerned with specific measures that are in it, they are more concerned that those measures do not overall deter capital flow, investments and trade.

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