22 augustus 2011
Dominic Rossi (CIO Equities) and Andrew Wells (CIO Fixed Income) did an audio webcast last Wednesday afternoon, which contains lots of interesting insights. 

Some quotes from this webcast:

Andrew Wells:

"Clearly a lot of the financial markets would like to see a euro bond as it makes their life a lot easier, but what it doesn't solve is the real difference in economic structures in the countries of Europe and doesn't address the issue of the amount of debt outstanding.

"It's a mayonnaise-ing of the problem across the whole of Europe with everyone paying a bit more or less. "

"There are some problems in the periphery; retirement age and spending on social welfare. There has to be a reality check on balancing your books and that would not happen if there was a euro bond as there wouldn't be any pressure.  "That's quite a strong message and I'm very supportive of it and think it will lead to strength in the future.

"These countries needed a reality check to balance their books. If eurobonds were introduced they would not feel the same pressure to make these changes and address their debt problems." 

Dominic RossiRossi compared the current situation that many southern European states are in to the emerging market sovereign crisis of the 1980s and 1990s, pointing to the need to generate surpluses.

"People forget that Brazil may be a success story today, but that success was built on the fact that it adopted a fiscal responsibility law that guaranteed fiscal primary surpluses of over 4% . 

"Many European companies are moving in that direction but they need to move further. Rossi added the recovery of emerging market economies showed the need for banks to have strong capital positions. He argued this need could ultimately lead to European banks selling up to their emerging market counterparts, in a reversal of the trend seen before the turn of the century.

"In the late 90s, American and European banks became very active in acquiring Latin American banks and recapping them. I suspect before the crisis is over we will see the reserve where emerging market banks will buy European ones and recap them, so you will have a complete circle."  He said the proposed eurobond could be used as collateral in a Brady-type programme. Individual countries would then continue to service debt at a differential rate.  "'This would stop the kind of savage short selling of government bonds that took place recently because the underlying capital is supported by these super sovereign bonds,' he said.  "'I hope someone is going to dust down the Brady plan and realise that it really is the solution. You can use it to reduce the quantity of debt because you can get the holders of Greek and Italian bonds to swap their sovereign paper for super sovereign paper, not at par, but at 70 or 80 cents on the dollar, so getting a better credit but ending with a lower principal."