Investors should avoid investing in Greek market: V Anantha Nageswaran

V Anantha Nageswaran, Head-Investment Research, Bank Julius Baer, in a chat with ET Now talks about Greek crisis.

Let's look at the Greek primary deficit, which is the deficit, which does not reflect the burden of servicing the previous or the existing debt, now that is 8.5% of GDP, which basically means that even if Greece was to repudiate all their debt, their problem is still not going away?

Well, they have to repudiate a lot for the problem to go away and that is the problem with the bond. At the end of the day as the discussion is clearly pointing to in the direction, there are no short cuts in this situation. You just need a fairly long period even close to a generation of three decades of the low standards of living.

Ultimately it is all about cost on competitiveness and you have to bring it down and that will be reflected in lower wages and lower standards of living and that is where the populace is resisting. So well they had a party for 10 years, interest rates were so low, they have to now pay the bill.

Sure but let's go back to a rather unusual comparison. Indira Gandhi's devaluation in 1966. Now Indira Gandhi could manage to devalue the currency by 36.5%. Now it is another matter whether there was an export recovery following that or not, there probably was not but there was at least import compression. Now Greece is in an unenviable situation of not really having a currency to devalue for them to really give a boost to exports.

I take your point about the debt being Euro denominated and, therefore, they may not be able to do much about that but what about not having this powerful tool to deflate the economy, which is you devalue and you get your export engine going?

If you take the situation in isolation today, not having exchange rate flexibility is a constraint, I can see that but we are forgetting the fact that for 10 years, they have the flexibility of ultra low interest rates, which they would never have enjoyed had they been on their own. So they basically were paying a spread of probably 10-20 basis points above the German 10-year bond, which is now trading at 600 basis points as you showed, what did they make with that, so that is where the answers have to be found.

Spain, Portugal or Greece given the demographics that they are going to face in the next 10-20 years and given the fact that they enjoyed a huge interest rate subsidy by belonging to the Eurozone, what did they make do with it, so there was an offset for the currency straightjacket that they found themselves in and they did not make use of it.

And if you have weak exchange rates, now with international commodity prices being securitised and being pushed up by low interest rates, they probably will have a big inflation problem anyway and you may not get the competitive advantage going for you.

Right, so how are you advising investors to position themselves for what you are seeing around your side?

There are two sets of advice. One is for those who want to speculate on Greek debt spreads coming down. As I said the word is 'speculate' not 'invest', so it's a speculation. So if you are not in and if you have money to throw around and waste and amble, then you can gamble on this as this spreads. But if you are an investor, I do not think you need to take this kind of risk. This is a Greek debt investment angle but there is a Euro angle, which at one point it is beginning to look quite a bit oversold to me. The market is also overlooking the structural issues in the US economy in the first place.