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Weak consumer confidence has put pressure on the euro, says Standish’s Leduc


David Leduc, manager of the BNY Mellon Global Strategic Bond Fund, says European policy responses to the crisis have erred on the side of being reactive, rather than proactive, which has led to a lack of investor confidence and has put pressure on bond spreads and on the euro. 

He says resolutions could include the European Central Bank monetising the public debt, movement toward increased fiscal union across all Eurozone states, or potentially the exit of some countries from the European state.

“Needless to say, all of these options come with considerable political challenges. Our view is that the implications are negative for the single currency, while the outlook for bond spreads is very uncertain. While the economic costs involved in a break-up provide tremendous incentive to work out relevant issues, the process will probably result in continued volatility,” Leduc adds.

In terms of our Eurozone exposure, he continues to favour Italy given that it is in the best health of all the peripheral Eurozone economies; it did not accumulate the private sector leverage seen in some other countries, and its banking system is well capitalised. 

Furthermore, Italy is slightly more competitive than many of its peers, as the proportion of its exports to non-Eurozone economies is on par with that of Germany.

The sovereign solvency of Ireland, Portugal, Greece, and even Spain is now being questioned.

“Meanwhile, our outlook for German growth is positive; domestic demand is strong, and export income remains robust. However, this has given way to domestic inflation, which has historically been a contentious issue for the German public. Looking ahead, given the poor health of the Eurozone, some higher-than-average inflation on the part of the German economy is required in order to rebalance current accounts in the region towards a model of increased saving for the peripheral countries, along with a large-scale liquidity programme by the ECB,” adds Leduc.

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