This should be another interesting week for Europe. On Friday, the euro fell to its lowest level in 18 months, world stock markets took a hit, and there has reportedly been a big sell-off in European periphery zone debt by large investors, with ECB doing the buying (as announced as part of the bailout plan). According to sources quoted in the FT, Pimco has sold all of its holdings in Greek and Portuguese sovereign debt. It also quotes an unnamed “head of one of the largest US asset managers” as saying “We think it is too risky to buy Greece and Portugal. The chance of restructuring is too high.”
Ramin Toloui, a senior portfolio manager at Pimco, is also quoted:
The European Central Bank’s decision to buy government debt could be backfiring. Instead of encouraging private investors to keep their government debt, the programme might be leading to more sales, he said.
“The risk is that investors are using the ECB as a vehicle to exit their positions,” he said.
Now, maybe I’m dense, but I guess I don’t understand why this is an unanticipated result. Though Gelpern doesn’t foresee a Greek restructuring in the near future, many others do (John Dizard reports in his column yesterday that "most of the lawyers, bankers, and emerging market investors" predict a restructuring within six months to a year). And, given the uncertainties associated with the “shock and awe” plan for the long term, surely dumping Greek and Portuguese debt onto a willing ECB buyer if given a chance is an attractive opportunity for some savvy investors unwilling to hold an asset much riskier than the reasonably safe European debt they originally bargained for?
Barry Eichengreen also comments on the “unprecedented purchases of Spanish, Portuguese, Greek, and Irish bonds by the European Central Bank,” noting:
rather than folding their cards, European leaders doubled down. They understand that their gamble will be immensely costly if it proves wrong. They understand that their political careers now ride on their massive bet. But they also understand that they already have too many chips in the pot to fold.
It’d be interesting to know exactly who was selling European periphery sovereign debt (other than Pimco) last week, and whether there were buyers other than the ECB. And how long does ECB plan to buy and what will happen when they decide it’s time to stop? A trillion could go pretty quickly under such conditions, it seems.
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