In the following interview, Andrew Balls, managing director and head of European portfolio management, highlights the conclusions from PIMCO’s quarterly cyclical forum in March and how they influence the firm’s European investment strategy, including the unique challenges of forecasting for the coming months given the dramatic long-term changes underway.
Q: The two Long-Term Refinancing Operations (LTROs) auctions seem to have improved liquidity conditions and asset prices. Is this a short-term fix, or has the European Central Bank (ECB) done enough to change the course of the eurozone economic outlook on a sustainable basis? Balls: The LTROs are an important source of support for eurozone markets and have succeeded in buying more time for the Europeans as they try and address their problems. The ECB introduced the LTROs at a time when France and the Netherlands, two countries at the core of the eurozone, were suffering significant contagion from the peripherals crisis – owing in part to the pressure on the banking sector in those countries.
The LTRO provides unlimited funding to European banks on generous terms against a wide array of collateral. While it has helped to truncate the risk of a banking sector collapse in Europe, there have been spillover effects into some sovereign markets, notably Italy and Spain and more broadly into credit markets. Partly due to political divisions, the ECB may not be in a position to act as a predictable lender of last resort to European governments. But it is an active and generous lender of last resort to the banking sector and has encouraged the recycling of liquidity into sovereign debt markets.
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This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. ©2012, PIMCO.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2013, PIMCO.
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