It’s difficult to see Greece hanging on in Eurozone: Schroders

India’s stock valuations are high and are at a 30% premium to emerging markets, said UK-basedSchroders Investments. In an interview with ET,Kenneth Lambden, Schroders’ global head of equities and Allan Conway, head of global emerging equities said Greece’s exit from the Eurozone is just a question of time. Edited excerpts:

Kenneth Lambden and Allan Conway

In 2010, you had warned that the sovereign debt crisis would be worse than many expected. Has it panned out the way you expected?

KL: It’s certainly worse than what I had expected. European leaders have continually taken small steps or no steps at all, which is best described in the saying kicking the can down the road. So, it’s all about forestalling the inevitable and this unsettles markets more and more. If there is one thing that the market hates, that’s uncertainty.

AC: The other thing that is worth bearing in mind is that even once we get through the peak of this crisis, we will be left with a very anaemic growth environment both in Europe and the US because this has been a balance sheet-induced crisis. This is a 5-10-year job even if the heat comes off in this immediate crisis.

There is a debate between growth and austerity in Europe.

AC: You cannot solve the problem of this severity by simply tightening the belts because the medicine runs the risk of killing the patient rather than curing. So, one has to accept that the issues are long-term and there need to be some growth policies to ensure that the patient does no die. So, one would hope that the Greek elections during the weekend could finally crystallise this issue. I think we may be nearing the peak crisis point where that final decision to create a credible firewall to address these issues in a more comprehensive way would be taken. A rampage through Spain and Italy that can be catastrophic.

What if Greece breaks out of eurozone?

KL: It’s an absolute possibility but I don’t think it will happen this weekend. The opinion polls show Greeks do not want to be out of the eurozone. I don’t think Greece is out yet, but it’s very difficult to see the country hanging on in the long term.

AC: So, what is going to happen if Greece stays in the eurozone over the next few months? They continue to try and follow the austerity plan that has been offered to them. But, if they accept and ultimately they are in a situation where they can make that work, the population will suffer. There the only way through is then a really significant relief coming through from Germany, which seems pretty unlikely. So, what may happen is that Greece may still exit; may not be this summer but Q1 next year. All that will happen is the period of pain will be extended.

Will a Greek exit have the same impact on financial markets that the Lehman Brothers collapse had?

KL: My gut feel is that we won’t, but I can’t say that with any concrete confidence. I think the Lehman situation came out of the blue. We did not have much time as an industry to understand the ramifications. I think that was potentially worse than this because we all know Greece is going to come out at some stage.

(curtsey: economic times)

Rupesh Yatesh Dalal
Head Research Department

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