Carmignac Gestion calls for euro devaluation

The euro should be devalued and a zero interest rate policy adopted by the European Central Bank (ECB) to stimulate growth in the Eurozone, Carmignac Gestion investment committee member Didier Saint Georges (pictured) has argued.

Saint Georges accused Europe of opting for the “Japanese method of tackling over‐indebtedness” rendering deficit and debt reduction impossible, or worse, “suicidal”.

“[Europe’s] exports are too low to offset the negative effects of austerity policies on domestic demand, and impatient foreign creditors are not willing to let ‘time take its course’,” he added.

According to Saint Georges, political indecision in the Eurozone has left the ECB with little choice but to take a “radical initiative without delay, orchestrating a sharp reduction in both the value of the euro and enfeebled governments’ refinancing costs.”

This entails cutting key interest rates to near zero and buying up non‐sterilised endangered countries’ public debt.

“The consequent depreciation of the euro would spur growth by making exports more competitive, while massive liquidity injections would counter deflationary pressures and maybe even generate a little inflation, thereby easing the debt burden,” he argued.

However, he noted that Germany, which is more likely to grow than most countries in the Eurozone, is likely to block any ECB initiative to slice interest rates despite Germany’s growth forecasts falling from 1.9% in August to 1.2% in September.

He added that as European banks are structurally vulnerable to tougher refinancing conditions with a credit/deposit ratio of 165% versus 81% in the United States, they are more likely to pressure households and businesses into repaying their debts.

“Bearing in mind that the weight of bank loans in relation to GDP is 164% in the eurozone compared with 62% in the United States, one can imagine the risk presented by this accelerated deleveraging, which a forced recapitalisation of banks would slow down at best,” he said.

Saint Georges’ investment committee has therefore assumed a defensive investment position.

“European authorities’ incomplete response to the debt crisis, as well political deadlock in the United States and China’s desire to leave in place its restrictive monetary policy to curb lending and inflation” have led Carmignac Gestion to maintain low exposure to international equities.

If the EU and IMF leaders manage to tackle the issue of growth throughout discussions in November, Carmignac Gestion may take a tactical position and increase allocations to international equities, Saint Georges said.

Yet unless the measures announced target short‐term growth, “our fund managers will maintain a defensive bias, in particular by minimizing the portfolio’s exposure to the euro,” Saint Georges concluded.

Saint Georges’ views were published in a Carmignac Gestion paper recently distributed detailing its strategy outlook for the fourth quarter.

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