Emma Wall: Hello and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by David Stubbs, Global Market Strategist for JPMorgan to talk about what's going on in Greece.
Hello David.
David Stubbs: Hi.
Wall: So we are here to talk about Greece. There has been a lot of movement over the last couple of weeks, months. And this morning European markets were up 4% because it looked like we had some good news. It looked like we were moving towards some kind of agreement. I spoke to someone recently who said that actually Greece doesn’t need to do anything because it can reduce its 180% debt to GDP by just achieving 4% economic growth a year which is what Spain is managing. What do you say to that?
Stubbs: Well, if only it was so easy. I think that 4% is a pretty aggressive growth target for any country especially a country like Greece which is seeing people leave and emigrate, which has lot of problems in terms of efficiency of its government, efficiency of its industry. There is large collection of islands where it's hard to actually develop.
So I think there is a range of issues around trying to get Greece to grow at that level not just for one or two years we are talking about decades. And I think that’s a very aggressive assumption. It's hard to make the sums add up for Greece, Greece's debt being sustainable right now. That’s what I think something needs to be done on that as well as some reforms at the country level.
Wall: I mean they are stuck a bit between a rock and hard place not just Greece and the Greek politicians. But all those involved in this agreement. So you have the two extremes of you give Greece a fantastic deal and contagion risk goes to Italy and Spain to stick out their hands and say we want that too or they leave and equally Greece and Spain stick up their hands and say, we want to leave too. So, how does one contain the contagion?
Stubbs: This is an incredibly difficult and complex issue. With losers on all sides, we've haven't seen any outcome at the moment. I think certainly, if Greece were to leave and suddenly this country falls apart than some of the movements we've seen that are wanting to do the same thing around the other periphery country like Podemos in Spain, will probably loose support.
The population would see what happens. But equally I think their populations would probably loose trust of their banks. Because they have just seen the Greek population have their savings converted into a much lower, weaker currency and of course this is all – that’s all ignoring the geopolitics. So you have Russia, to the east you have the Middle East on fire as well.
It's just the time you have to breakup this European project that’s all issues that the leaders are discussing, but of course if you do what you need to keep them in and you give some debt relief there than a lot of other countries that have had a really hard time. You know the Irelands, the Latvia, the Spain, lot of sacrifice there. They want a similar deal, so you see why they were reluctant to move either way other than the politicians of Central Europe.
Wall: I expect what will happen is there'll be a classic European fudge, the can will be kicked down the road even for two, five, 10 years' time and it will be part of this renewed commitment in Europe to sustain growth. It's the same reasons that we've seen quantitative easing. Europe is behind the U.K. which in turn is behind the U.S. in turning their recovery into some sustained growth. Will Greece throw that off course or do you think that Europe is on a one way trajectory.
Stubbs: There is a lot of optimism about the Eurozone economy in general right now I think that's justified. You are seeing a clear bounce back in consumer confidence, in business confidence, activity credit lending, the low euros help lower oil prices.
There is lot of reasons why Europe is really good right now. But yeah, by kicking the can down the road for Greece it doesn’t really solve the Greece's problem. Sure it will benefit for the countries around that are doing well. But that’s not going to solve this issue. So I fear if we don’t solve it now we're just going to be talking about it again in another few months and it is going to cause further rise in tensions.
But I think investors need to concentrate on the fact that Greece is a tiny part of the Eurozone economy it's not even classified as a developed country any more, it's not in many indices that you or I would invest our money in. Therefore contagion into investors portfolio should be limited especially if they concentrate on some of the larger countries.
Wall: David, thank you very much.
Stubbs: Pleasure.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
