Apparently the only people in the world who don’t know the Euro crisis is about to get worse, are fund managers.
Last week when Portugal’s largest bank, Banco Espirito Santo shat the bed so to speak, most of the world perked up and was rightfully concerned. It was a clear indication that things in Europe are still very much “not okay”.
But not fund managers: According to the Wall Street Journal, they’re confident that this will all blow over in no time.
Large money managers don’t expect the worries over one of Portugal’s largest lenders to have a lasting impact on global financial markets depite a rout in Europe’s markets Thursday.
“This particular incident seems fairly isolated to the Portuguese bank as opposed to a return to the euro zone crisis of a few years ago,” said Eric Stein, global fixed income portfolio manager at Eaton VanceEV -0.13% which has about $286 billion assets under management.
Mr. Stein said he believes “many of the euro zone bonds out there may continue to rally in the short-term after we get through this Portuguese bank issue” thanks to firm support from the European Central Bank’s easy monetary policies.
Right then. Glad that’s settled. For a minute there we thought the only thing holding Europe together were bank bailouts from Europe’s unelected leaders and an apparent refusal to have a “plan B”.
But then there’s this chart, which clearly shows that on a private-sector level, Europe hasn’t managed to de-leverage much at all since the crisis.
Given the problems with Banco Espirito Santo, we can’t help noticing that Portugal’s private-sector has barely even begun to de-lever and serious tremors are already shaking up her banks. One seriously has to wonder what new surprises should await us if Portugal’s private debt levels were to descend to a mere 200% Private Sector Debt to GDP (let alone some level resembling “responsible”).
How anyone can think Europe is “on the mend” is beyond us. But the experts say otherwise:
Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, NJ, which has over $400 billion bonds under management, said the selloff provides a buying opportunity.
“Looking six to 18 months ahead I’d expect, all else equal, Portugal to fully recovers from this and then some,” he said. Mr. Tipps said the company has added to its holdings of euro zone’s periphery government bond holdings in recent weeks.
That light blue line above sure doesn’t look like it’s falling fast enough to be anywhere near safe within 6 months, to us.
With all this abounding optimism we might have retreated into our man caves to leave the thinking to the “experts” – but then along came a certain CEO:
Maximilian Zimmerer is the CEO of Europe’s largest insurance company, Allianz. His take on the situation in Portugal?
“The fundamental problems are not solved and everybody knows it,” Maximilian Zimmerer said at Bloomberg LP’s London office. The “euro crisis is not over,” he said.
“There is only one country where the debt level last year was lower than 2012 and this is a signal the debt crisis can’t be over, only a recognition of the debt crisis has changed,” Zimmerer said on July 9. “If the debt levels are not going down in the end we will have a problem, that is for sure.”
Oh no you didn’t, Maximilian.
In our view, Zimmerer hits the nail rather squarely on the head. But Portugal isn’t really where we’re looking.
Italy is a much bigger deal than Portugal
Actually, to be fair, both Italy and France continue to be larger and more serious issues than Portugal, across the board. But Italy in particular is a disaster. Italy’s GDP is approximately 10 times the GDP of Portugal. The problems there are exponentially more serious.
(Please note that the pale blue boxes below are “estimates”)
As the Wall Street Journal reports:
What should worry investors is less Portugal but the fact that growth appears to be stalling in some of the euro zone’s biggest economies. The latest surveys point to manufacturing having contracted in June in Germany, France and Italy. Some of this may be explained by one-off factors, including weather disruptions and the timing of public holidays. The crisis in Ukraine also appears to have hit German exports.
But the real disappointment has been in the weakness of the recovery in the new sick men of Europe: France and Italy, both of which have been slow to deliver the reforms that have been boosting productivity and competitiveness elsewhere in the euro zone. Indeed, whereas J.P. Morgan last week raised its growth forecast for Spain for this year to 1.5%, reflecting the success of its structural reforms, it downgraded its forecast for Italy to 0%.
Given the size of its economy and the scale of its public debt—at 133% of gross domestic product—Italy’s lack of growth remains the single biggest threat to the stability of the euro zone. Yet to the concern of many policy makers and investors, Prime Minister Matteo Renzi appears to be spending more political capital seeking changes to euro-zone fiscal rules to allow Italy to borrow yet more, than he is on pushing through reforms that might boost Italy’s growth prospects.
One thing is for sure, there are loads of fund managers who are going to lose their shirts. The situation is still far from over, and we predict major losses on the horizon.
Will Draghi’s gift of $1.4 Trillion dollars to Europe’s banks solve Europe’s predicament? Of course not. We’ve seen that movie before.
This gets worse before it gets better.