Greek default ‘inevitable’ says Newton’s Iain Stewart

Despite yesterdays’ historic deal by the eurozone members to bail out Greece a second time, asset manager Iain Stewart at Newton believes that the country ultimately will default.

The manager of the Newton Real Return fund says: “We have little new to add to the debate on the specifics of Greek debt dynamics, other than to agree with most commentators that some kind of default is ultimately inevitable, and probably desirable for Greece.”

“The important point is that, although the detail of how, and in which sectors, debts have been allowed to build up may be subtly different in Greece, Portugal, Ireland, Iceland and even, for that matter, the UK and US, all are a result of the sort of monetary distortions – cheap money has led to a mispricing of risk for both borrowers and lenders.”

Stewart adds that he believes the eurozone situation will remain volatile.

“Ultimately, the pressures which have built up in the system will lead either to more political integration, or to a radical redrawing of the map of states which can function effectively with a single currency. In the meantime, the EU authorities, rather than addressing these bigger issues, seem content to procrastinate with various plans that pile more debt on economies clearly unable to cope with the burdens they currently carry.”

“If the sovereign debt crisis is, as seems plausible, the second phase of the global banking crisis, it is certainly showing some uncanny similarities with phase one, in that the official line tends to characterise the continuing malaise as a series of distinct and temporary liquidity problems, rather than something more structural which involves serious solvency risks.”

“While the Greek example shows that both the recovery and financial system in the West remain extremely fragile, it also illustrates starkly that confidence about growth and the sustainability of debt are inextricably linked. With this lesson firmly in the front of policymakers’ minds, current extremely loose policy settings – negative real interest rates and bond yields in most of the mature economies – are likely to be maintained for as long as financial markets will tolerate them, with the aim of back-stopping asset prices and consumption, encouraging investment and eroding the debt load in real terms. Moreover, maintenance of loose policy in the developed world is likely to lead to more divergence in policy globally as faster-growing developing world and resource-rich economies are forced to tighten and/or let their currencies appreciate to avoid inflation.”

The Newton Real Return fund is an ICVC incorporated in England and Wales.

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