Global central banks could cushion the blow on account of Greece: Jan Lambregts

Interview with MD and global head of financial markets research at Rabobank International

Global financial markets have seen a lot of volatility on account of developments related to Greece. London-based Jan Lambregts, managing director and global head of financial markets research at Rabobank International, tells Puneet Wadhwa that equity as an asset class would come under pressure in a general risk-off environment. Edited excerpts:

What are the implications for the global financial markets in case: a) the Greek referendum goes through; b) talks collapse?

The initial market reaction to the referendum has been relatively moderate. Equity markets were down, with peripheral bank shares in particular underperforming, while peripheral yields rose. So far, this fits a pattern of risk-off / aversion, rather than uncontrolled contagion. The euro and  dollar initially rose, helped by strong Swiss buying in EUR (euro) /CHF (Swiss Franc). If the referendum takes place, it will depend on the outcome and who gets to define what ‘Yes’ or ‘No’ exactly means on what it implies for financial markets.

Do you expect a collapse of Greek banks when they reopen next week, which in turn exposes other European banks to large losses if they have invested in Greek debt?

Greek banks are essentially on life support, offered by the ECB’s (European Central Bank) emergency liquidity assistance (ELA). Should the ECB pull the plug, the banks are essentially insolvent. Maintaining the ELA at current levels has already resulted in a bank holiday until early next week. One should note that contrary to a few years ago, Greek debt is mostly in the hands of official creditors - that is, governments or quasi-governmental institutions. So, the risk for private  sector contagion is much smaller.

Rabobank earlier forecasted the US Federal Reserve (US Fed) to hike rates in December. Have you changed your estimates given the developments in Greece? By when do you expect a lift off now?

For the time being, we maintain our forecast for a 25 bps (basis point) hike in December 2015. This hinges on our base scenario that a kicking-the-can-down-the-road type of deal will still be reached in Greece in the upcoming weeks.

Do you think the developments could trigger a risk-off in equity as an asset class across the globe? How insulated is India given its macros and the road ahead for reforms?

Risk-off is very much the flavour so far this week. A further deterioration in the Greek situation can’t be ruled out, with the risk scenario being a Greek exit, or Grexit as it is popularly called, from the eurozone. In which case, equity as an asset class would come under pressure in a general risk-off environment. We note this will likely result in a strong central bank response across the globe, which may very well cushion the blow, or even prove conducive to renewed gains.

There was a view recently that policies followed by major central banks around the world were in danger of slipping into the kind of beggar-thy-neighbour strategies that were followed in the 1930s. Do you agree? Why / why not?

We very much agree. Having lowered interest rates to very low levels already, the major central banks have run out of ammunition other than quantitative easing policies aimed at weakening their respective currencies. This started with the US a few years back, was followed by Japan and now the Eurozone is taking a page from this book. In particular the ECB's aggressive quantitative easing that's very much linked to a weaker euro, has forced other central banks across the globe to react.
 

How does India look as an investment destination amid all this? Are fundamentals strong enough to withstand negative surprises coming from the eurozone, US Fed, oil prices, etc?

Indian fundamentals have been improving and hopes of additional reforms by the Narendra Modi-led government remain in place. But there would be strong headwinds; so it’s relevant to watch them closely.

We recently witnessed a sell-off in sovereign bonds that sent the global financial markets into a tailspin. Can this happen again and what are the likely reasons that it can trigger it?

The May/June sell-off was a reaction to overbought conditions. The key reason for the spike in rates was that people believed the eurozone recovery was gaining some traction. This has since been overtaken by events in Greece pushing up yields in the periphery for very different reasons.

What are the implications for India?

Implications for India vary depending on what’s driving higher rates. Should the topic of Greece go away after a temporary deal, we may see higher rates pressure return due to a successful re-inflation of the economy.