Euro economy, markets should recover on Greek deal - Roubini

By Jamie McGeever

LONDON (Reuters) - If implemented, the last-gasp deal to keep Greece in the euro zone should allow the region's economy and markets to regain the momentum they showed earlier this year by removing an existential threat to the 19-nation-bloc, economist Nouriel Roubini said on Monday.

The agreement, despite its imperfections, shows that Europe will ultimately pull together, even to try to help its weakest link, said the professor of economics and international business at the Stern School of Business, New York University.

If there had been a 'Grexit' - Greece exiting the euro zone - a "fundamental repricing" of euro zone assets would have been appropriate, said Roubini, the man known as "Dr Doom" who was among the few to predict the U.S. housing crash that triggered the global financial crisis.

"It's a constructive deal, positive for the euro zone, and means that for now, those tail risks that would have led to a more fundamental repricing of euro zone assets should not occur," Roubini told Reuters in an interview in London.

"You don't necessarily have to be negative or underweight on the euro zone because there are some of these risks."

After 17 hours of negotiation, euro zone leaders made Greece surrender much of its sovereignty to outside supervision in return for agreeing to talks on an 86 billion euros bailout to keep the near-bankrupt country in the euro.

A Grexit would call into question the whole euro zone project, which would cease to be a true monetary union and instead turn into a collection of fixed exchange rate regimes. The inevitable question would then be, 'Who's next to leave?'.

But that has been avoided, at least for now, lifting the clouds of market and economic uncertainty. As Roubini noted, the euro zone had been performing relatively well in the first few months of the year, according to activity, sentiment and growth indicators.

"The question is, do you have enough time to do the kind of structural reforms that are going to increase potential growth over the medium term?"

Roubini pointed to the examples of Spain and Ireland, two "peripheral" euro zone economies that suffered terribly following the 2008 crash but which have recovered impressively after undertaking a range of economic and structural reforms.

It might take Greece longer, given its deeper-rooted difficulties, but there is no reason why it cannot recover over time if it follows a similar path, Roubini said.

"If you reduce the tail risk of the Greek crisis, then the improvement on a cyclical basis of the euro zone can continue," he said.

The euro zone economy expanded by 0.4 percent in the first quarter, giving an annualized rate of growth around 1.6 percent. Some economists had penciled in growth of more than 2 percent for the calendar year.

The economy is expected to benefit from low interest rates, bond market yields and a weaker exchange rate thanks to the European Central Bank's 1 trillion euro quantitative easing bond-buying program that will run through September 2016.

This cheap money should support euro zone stocks and bonds, especially as the U.S. Federal Reserve is expected to raise interest rates later this year.

On Greece specifically, Roubini said money should flow back into the banking system over time, sentiment will start to improve, and growth should eventually pick up.

There will be no quick fix though, especially given the fragility of the banking system. Capital controls will likely remain in place, to some degree, for several quarters to come, he said.

Greek banks have been closed for two weeks, and depend on central bank funds to counter heavy deposit outflows and stay afloat. The ECB kept its level of emergency funding for Greek banks unchanged on Monday at just under 90 billion euros.

(Editing by Philippa Fletcher)

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