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Cold reality nudging Europe to U.S.-style rescue tactics
December 6, 2011 / 10:17 PM / in 6 years

Cold reality nudging Europe to U.S.-style rescue tactics

NEW YORK (Reuters) - Hope that Europe is getting a handle on its debt crisis has grown in recent days, and several top U.S. money managers think they know why: the Europeans are finally starting to walk and talk a bit more like Americans.

Tad Rivelle, chief investment officer for fixed income at TCW, speaks during the Reuters Investment Outlook Summit in New York December 6, 2011. REUTERS/Brendan McDermid

Since the crisis began nearly two years ago, the European Central Bank has been reluctant to follow the Federal Reserve and act as lender of last resort to banks and governments facing ever-rising funding costs.

While it has stepped in to buy Italian and Spanish government bonds when borrowing costs have risen sharply, it has stopped far short of the massive money printing carried out by the Fed since 2008.

But with Germany and France agreeing this week to start moving toward a fiscal union and the ECB expected on Thursday to cut interest rates, which are still more than a percentage point above U.S. benchmark rates, things are starting to change.

Until recently, “the Europeans kind of ignored the problem, whereas in the U.S., it was a big plunge into stimulus,” said Tad Rivelle, chief investment officer for fixed income at TCW.

“The only solution is for the ECB to behave more like the Fed,” Rivelle, who helps oversee $120 billion in assets, said Tuesday at the Reuters 2012 Investment Outlook Summit.

ECB President Mario Draghi hinted last week the bank could do more, provided governments do more to cut their deficits.

Since August, the ECB has spent well over 130 billion euros ($173.97 billion), averaging just over 8.2 billion euros a week. Analysts estimate the breakdown, which the ECB doesn’t divulge, to be around 45 billion euros worth of Greek debt with a large concentration in recent weeks of Italian and Spanish bonds.

In contrast, the U.S. central bank has poured $2.3 trillion into the financial system since 2008 through asset purchases, provided emergency liquidity to banks, cut interest rates to zero, and recently pledged to keep them there well into 2013.

David Joy, chief market strategist with Ameriprise Financial, said draconian austerity programs in Europe are complicating things even more, making it harder for countries to grow their way back to fiscal health.

“It’s been in complete contrast to the U.S. instinct, which was to stimulate,” said Joy. “Someone’s going to be wrong here. I think Europe runs the risk of proposing too much austerity and starving the economy of growth in the short run, making matters worse.”

The United States’ actions have earned it almost as much criticism as praise. Many investors fear the gusher of money will eventually stoke inflation, undermine the dollar and drive up financing costs for a government running a fiscal deficit, which at nearly 10 percent of gross domestic product, is one of the largest since World War Two.

“I think we’ve lost control of inflation in this country,” said Tom Sowanick, chief investment officer at OmniVest LLC in Princeton. “The Fed and the Treasury have been playing with fire, and the ECB may now be moving in the same direction.”

Sowanick said he was short the dollar and wary of owning Treasuries at their current low yields.

DESPERATE TIMES

Others say desperate times call for desperate measures, something the Europeans have had a tough time admitting.

Leo Grohowski, chief investment officer at BNY Mellon Wealth Management who helps oversee $170 billion in assets, is worried about inflation over a three- to five-year horizon.

“The Fed has administered some very powerful medicine over the last year or two. The side effects, none of us know,” he said. But, “say what you will about the policy response they’ve put in place, it worked to thaw financial markets.”

Stakes are similarly high for the euro zone, where short-term funding for banks is drying up and borrowing costs for Italy and Spain hit euro-era highs -- levels that may make it too costly for them to refinance their debt.

“Markets were punishing Europe for not doing what the U.S. did,” said Tim Duy, an economics professor at the University of Oregon. “That tells me again that policy makers in the U.S. did the right thing.”

There may, however, still be a comeuppance for America.

Douglas Borthwick, who heads FX advisory and execution firm Faros Trading, has been championing Europe and the euro throughout the crisis despite talk of a euro zone collapse.

“We’ve had a lot of heated conversations. People have been very negative on Europe,” said Borthwick, whose clients include hedge funds, real money accounts, corporations and central bank reserve managers. “But that’s because people are negatively biased toward Europe, but not taking into account all the problems the U.S. has.”

He predicts a much stronger euro, which was last trading near $1.34, in 2012 and renewed dollar weakness.

What’s more, the Fed’s actions haven’t brought much jobs growth or bolstered the flagging U.S. housing market.

“Stimulus in America didn’t have as much impact as people hoped it might,” said Kenneth Fisher, an investor and author whose money management firm oversees $40 billion. “I don’t think fiscal restraint (will have) as much negative impact as people fear it might.”

($1 = 0.7472 euros)

Reporting by Steven C. Johnson and Daniel Bases

Our Standards:The Thomson Reuters Trust Principles.
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