Mumbai: Although it is weighing heavy on Europe, the Greek debt crisis isn’t serious enough to turn into a global contagion, Paul Donovan, senior economist at Swiss financial services firm UBS AG, said in an interview. Edited excerpts:
Cautious optimism: UBS senior economist Paul Donovan.
Do you fear the Greek debt crisis is turning into a global contagion?
I don’t think we are at the stage yet where contagion is a serious risk. The main concern would be if there was a fear in the banking system. Banks stopped lending to one another in the way they did in October 2008 after Lehman collapsed. At the moment, although there are signs of increasing risk aversion and caution by banks, we are not anywhere near the stage that we were in 2008.
Is the euro facing a collapse?
The euro itself is likely to survive the crisis. I don’t think that there will be countries leaving or a break-up of the euro. Nevertheless, some investors are clearly concerned and as a result reluctant to hold euro in their portfolio. The reaction of policymakers in Europe till date has not been very good at all.
Policymakers seem to think that they are fighting a speculative attack. This isn’t a speculative attack on the euro, but is a genuine problem for the euro. We need to see policymakers offering a more coherent strategy for dealing with the problems that the euro zone has got. I think the euro will weaken further. I don’t think the euro is a good currency at the moment. (But) I wouldn’t predict a total collapse and I won’t be predicting a break-up of the euro at this stage.
Can emerging markets (EMs) withstand this situation?
At the moment most EMs, most markets outside of Europe have still got reasonably good sources of demand, domestic demand remains relatively firm, US domestic demand is improving... Even in Europe, things are not disastrous... The risk would be if fear of fiscal problems grew still further in the global economy and then some emerging markets would have to look closely at their own budget positions just to make sure that they weren’t vulnerable to contagion of fear.
We have seen cash outflow from the Indian market and the region. Is there more of this to come?
I would still say that equities today are expecting relatively good earnings growth. If we are talking about an escalation of the crisis, one which revises expectations of global growth from the current slightly above trend average, then we would be obviously more pessimistic about where equities are going. If you are going to escalate the crisis further, you have to start questioning some of the underlying earnings assumptions that are in global numbers. Certainly, I wouldn’t regard the current sell-off as being an automatic buying opportunity.