Quick Fix Unlikely: Allianz

Andreas Utermann, Global Chief Investment Officer at Allianz Global Investors/RCM, provides his outlook for 2012. 

Budget deficits

Our prediction for 2011: While major sovereign defaults have been averted, the spectre of debt restructuring or even default for some of the eurozone’s peripheral countries would continue to haunt the markets.

“While our expectations for ongoing debt problems in the eurozone have turned out to be correct, we did not and could not have anticipated the kind of escalation of the debt crisis which we have witnessed since the summer.

“Given the complexity of the problems, a quick fix is unlikely. Political actions which can realistically be implemented - i.e. fiscal tightening, tighter harmonisation of economic and fiscal policy in Europe - take a long time to be implemented and even longer to be effective; in our view most likely too long for financial markets.

The longer the debt crisis looms, the bigger the political risk. As the recent developments in Greece show, there is a real threat of a break-up of the eurozone, if political processes get out of control.

“While debt monetisation is already on the agenda in the US and UK, this process is not yet on the agenda in European Monetary Union (EMU), even though the European Central Bank (ECB) has become more ‘Fed–like’ recently. Medium-term, though, we think that a more active and aggressive role for the ECB is a likely outcome. This necessitates decisions by policy makers to build a much more fiscally and politically integrated eurozone including sanctions for countries with unsound fiscal policies.”