Allianz offers solutions to “tragedy” of financial repression

Mario Draghi may have calmed fears among institutions about the ability of Eurozone states to meet their bills, but the financial repression necessary to buy indebted countries breathing room has put the problem of low interest rates near the forefront of large allocators’ minds, new research finds.

This concern among institutions, extending from core debt increasingly to the compressed yields in credit as well, comes as interest on German Bunds, UK gilts and US Treasuries remain stubbornly low.

The problem this creates is laid bare in Allianz Global Investors’ latest Risk Monitor report on European institutional investors’ opinions and fears.

And AGI cautioned Europe’s value-destructive era of ‘financial repression’ – keeping rates artificially low while accepting inflation, to cut public debt – could last for an extended period.

James Dilworth (pictured), AGI Europe CEO, said: “Many investors have taken a ‘wait and see’ attitude because they think the normalisation process will happen quickly but in our view it will not.

“In the new age of financial repression the losers will be savers, pensioners and long-term investors. The winners are those people taking up lots of debt. That is not a healthy environment, especially where there is an ageing population relying on financial assets and deposits for income.

“If there is no change all of us expecting a pension will have to accept that returns will be lower. If you look at the finances of all governments their need to continue to find inexpensive ways to finance parts of their debt is greater than trying to appease [the elderly]. There is a huge socio-economic problem developing, but right now the pressing problem is ‘how do I finance my debt?’.”

The pressing problem for institutions, sometimes forced to be those financiers, is where else to find better yield.

The proportion that said in October current rates endanger their 12-month investment goals to a ‘huge’ extent is 21%, roughly in line with readings from the previous three six-month periods. Meanwhile, those saying sovereign debt risk is a ‘huge’ impediment fell from 21.2% in the first half to 13.2%.

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