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Rich Pickings

Regional Head of Research at Standard Chartered Bank, Marios Maratheftis discusses the eurozone, Greece and a common currency for the GCC.

July 16, 2012 4:16 by

So, if India goes on to five and China stays around seven. . .

The thing is, India would be around the 5.8 level, which is low by Indian stan­dards, but there is still some growth in India.

What is the nightmare scenario for the Gulf?

The nightmare scenario for the Gulf, for the GCC right now, we are still dependent on oil, so you see oil prices at 30, you see flows into the East, capital flows dry and you see prices going to 30 and stay­ing at 30, not just touching 30 and then rebounding. If we go into a new environ­ment of incredibly low oil prices for a few years then the ability of the GCC to keep spending on their own economies would be affected, and I am not convinced that the GCC would be using the reserves, the savings of the past years to fill that gap, so low prices for a sustainable period of time for a few years will affect investment in the GCC and that would be the nightmare scenario for the region.

Moving on to Greece, people have been talking about the fact that whatever happens Greece is going to have to ei­ther exit and default or drive their way out; they’re going to have to print so much money that they would create so much inflation . . . most likely having a strong impact on the Gulf.

In this environment, the printing of cash will not trigger inflation. We are in ex­traordinary circumstances, in normal cir­cumstances the printing of cash will create inflation full stop. But we are in an environ­ment where the US is in a credit trap, so we have zero interest rates. The US is in a liquidity trap so there is room for interest rates to fall further.     Economic activity is not really picking up, so the printing of cash in this liquidity trap environment would not be inflationary, it’s necessary. The problem in Europe is not Greece, if Greece would exit and that was it, that wouldn’t be a prob­lem. It’s a tiny economy. The problem with a Greek exit is not a extreme scenario by the way, its pretty likely scenario. Unless there is a big change in the European poli­cies, Greece will not be kicked out. Greece will have no choice but to exit. Simply be­cause the numbers do not add up, and they have never added up, and that’s why I am shocked with the bail out plans that the Eu­ropean’s have come up with as they know they are inadequate, yet they keep coming up with a plan that is destined for failure. And it’s shocking that every time we have, we know it’s going to fail from the very be­ginning, then we act surprised when it fails. The problem with the Greek exit, with a possible and even likely Greek exit, is that it fundamentally changes the nature of the euro. Because the fundamental building block of the euro, of a common currency, is that it is irreversible; once you are in you can’t get out.

By being irreversible is being made credible. It’s only credible because it’s ir­reversible. Now if a country leaves this is no longer an irreversible arrangement, it’s no better than the peg we had in the 1990s. I think it’s naive to think that Greece will exit and nothing else will happen. It will only be a matter of time, it might not be immediate, but it will only be a matter of time before other countries are forced to exit as well. It will only be the beginning of the end of the euro. Think about it this way, if Greece exits and people saving turn into drachmas from euros over night, do you think the Spaniard savers will not be concerned? Do you thing the Portu­guese will not be concerned? It’s very dif­ficult to manage it, and I think the Euro­peans are probably over-estimating their ability to ringfence everybody else from the euro. And their past track record from the response of the Europeans to the prob­ lem does not make one optimistic. They are behind the curse, and they have been consistently behind the curse. 

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