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Turmoil in Europe is coming to a head, and we will see a peak in the stress there in the next few months, Nomura analysts believe.And ultimately, the only way out of the ensuing panic will be action from the European Central Bank.
“Since last year we’ve had this idea that we’re going to be reaching a peak, that Q2/Q3 will be a decisive moment for the crisis in Europe,” Nomura’s Global Head of Fixed Income Des Supple told analysts today in a conference call. He added, “we are seeing the manifestation of crisis accelerators.”
Political angst in Greece, new doubts about euro countries’ creditworthiness from ratings agencies, Spanish banking problems, fears about the risk on Spanish sovereign debt, “insufficiently loose policy” from the European Central Bank, and a “home country bias” towards domestic assets in Northern Europe have all been driving fears to a head.
Colleague Jens Nordvig, Nomura’s Head of Fixed Income Research in the Americas and Global Head of G10 FX Strategy explained that all signs from investors point to an escalation of the crisis.
“Over the last two months, we’ve seen a new face of deterioration,” Nordvig told analysts. “The most important element is what euro investors themselves are doing…It is very, very rare to see investors accumulate foreign assets in a bear market, so this tells me that we are essentially entering a new, even more dangerous point in the crisis.”
“We are reaching a point over this time period—which may be accelerated by Greece—which requires a proportional policy response,” Supple concluded.
This policy response, analysts believed, would be nothing less than full-scale quantitative easing, a policy which the ECB has so far resisted because it would monetise sovereign debt.
“We need QE to happen. Our core view is you will need QE,” Supple said, explaining that it “will be focused on taking [sovereign debt] assets away from the banks” in order to cleanse their exposures to troubled sovereigns. That said, “it won’t happen until things get a whole lot worse.”
Nomura analysts on the call believed that other suggestions—another LTRO or eurobonds—are doomed to fail. “LTRO3…would have a very limited effect in contrast to the old LTROs” because investors are more concerned about solvency than liquidity.
Eurobonds, too, would be ineffective because current plans would require countries to issue separate national sovereign debt in addition to joint euro-wide debt. While they would pay less on joint debt, the issuance of a more reliable centralized European debt would drive investors away from riskier debt issued by individual sovereigns.
“I can’t stress how bad this is,” Supple said, referring to Eurobonds.