Greek default: Three months and counting

Christophe Caspar expects financial markets will be rocky over the next few months and warns that stock prices could drop as much as 50 per cent if a Greek default turns into a disorderly rout. But a year from now, we'll be fine, he says.

Based in London, Mr. Caspar is the chief investment officer for multi-strategy funds worldwide at Russell Investments, which oversees about $160-billion (U.S.) in assets. Prior to his move to London in 2009, he lived in Tokyo and oversaw Russell's investment management and research for Japan and the Asia-Pacific region.

Mr. Caspar spoke to The Globe and Mail in Toronto, before travelling on to Russell's head office in Seattle.

What is your outlook?

We [see]a number of risks out there. Some of them are priced in. Some are not priced in, and may not happen, but we need to keep an eye out.

The sovereign crisis [in peripheral]Europe – Portugal, Italy, Ireland, Greece and Spain – has moved into a banking crisis, or not far from it.

If you look at interbank lending rates, we are at very high levels. The big banks in France, and to some extent in Germany, have lost half of their value, if not more, since the beginning of the year.

We are close to certain that Greece will default at some stage, [most likely] in December. We don't think Greece will be able to raise the necessary taxes to justify the IMF stepping in and [advancing more money]

So that leaves us two or three months for Europe to sort out what it would do, how it would manage an orderly default [by Greece] I think an orderly default is more or less priced in the market today.

What other risks do you see?

The risk besides Europe is a China slowdown. We've seen the third consecutive month of a contraction, or a slowing down in the [country's]manufacturing index.

China is the X-factor, especially for commodity-driven countries like Canada. When we talk about a China slowdown, we don't talk about a Chinese recession, we talk about China going from 9-per-cent growth to 6-per-cent growth. But that's enough to put the world into recession.

If you take a 12-month view, [global markets will]probably be fine. The problems won't get solved from one day to another, but we'll have a plan where there's agreement [in advance]on which bank loses what, an agreement on what happens with Greek debt restructuring-wise.

Greece will stay – in my view – in the euro because the other option is simply not feasible. Greece getting out of the euro would probably mean contagion to other countries [like]Italy and Spain. [And]we can't afford to have Italy going down. It's too big a country.

On a 12-month view, we see the U.S. not going to a recession. [But]the next few months will be rocky. Further downside is completely possible in markets because we think the European crisis is going to test the nerves of investors, especially Anglo-Saxon investors.

How has your view changed since July?

I think the change versus July is that the economy has weakened quite a bit since then. There's probably more downside risk in the next few months than upside, and I think it's more prudent to be cautious with investors' money now.

How are you moving your assets?

Early September, we moved from a neutral stance to a defensive stance, where we underweighted risky assets. We still have that positioning today.

We believe that the downside risk is so big that you want to protect your money. And if you miss a little bit in an upside – if let's say there is more positive news than expected – we'll be fine.

But currently, there is downside risk. An orderly default [by Greece]is the central scenario. A disorderly default is an Armageddon-type of scenario, where we could see indices going down 20, 30, 40, 50 per cent from here.

This interview has been condensed and edited.