Structural reforms necessary in single currency area, says Allianz GI’s Naumer

The Fed will reduce its bond purchases from autumn, according to global head of Capital Market & Thematic Research at Allianz Global Investors Hans-Joerg Naumer.

A look at the economic map reminds us that we are facing imbalances which have developed over years and decades and which will cause seismic shocks for some time to come. The US central bank is counteracting the consequences of a “savings glut” (as Ben Bernanke called it) from Chinese current account surpluses and cheap money from the “Greenspan put”, which led to excessive consumption and a housing market crisis, followed by flooding the markets with cheap money once again.

The Japanese prime minister is trying to control the after-effects of a real-estate-market implosion (which have been ravaging the country’s economy for more than 20 years) by introducing a mix of aggressive monetary and fiscal policies. And the European countries are slowly realising that central-bank money will not resolve all problems. While it may reduce the pain in the short term, structural reforms will ultimately be necessary in the single currency area.

ECB Board member Jörg Asmussen pointed out that the euro area would have to undergo painful and difficult adjustment procedures and that the crisis might remain for another ten years.

During the past week, Portugal and Greece reminded us of this fact. Equity prices fell in both countries. Portugal issued new bonds – whose yields were similar to those of Nigeria – and the troika will visit the country at a later date to give it more time to make progress with its adjustment. Meanwhile, Greece has to lay off state employees and needs to refinance €10bn in September.

On a happier note, Standard & Poor’s raised Ireland’s rating outlook from “stable” to “positive”. And the spreads of 10-year Spanish government bonds over Bunds narrowed encouragingly.

China is undergoing adjustments, too. While the official GDP growth rate was confirmed at 7.5%, the government appears to be fighting against an unwelcome credit expansion in order to calm the housing market. Chinese home sales were up 24% year-on-year in June 2013. This suggests that the government’s recent measures to cool down the housing markets have failed. What does this mean? Adjustments are necessary.

Fed Chairman Ben Bernanke seems to think so, too. He is adjusting both the Fed’s monetary policy course and his rhetoric. On Wednesday, he once again finetuned his statements on “tapering” in front of the Congress. This was the real capital-market event of the past week. We believe that his statements continue to suggest that the Fed will reduce its bond purchases from autumn, but is unlikely to hike the Fed Funds Rate until mid-2015.

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