The European Central Bank must go beyond liquidity injections and buy more government bonds to address the sovereign debt crisis in Europe before further problems arise with even serious consequences for the euro, Pierre Lagrange, co-founder of investment manager GLG and founder of MAN Asia said on Tuesday.
“LTRO [the ECB’s long-term refinancing operation] was an extraordinary solution to the liquidity problem that we had prevailing in the banks, but it doesn’t address the underlying problem,” Lagrange told “Squawk Box Europe”.
The underlying issue - a problem at the sovereign level – had a circular effect on the banks, he said.
“Giving the money to the banks to help is massively important because otherwise we would end up with a problem at one of the big banks,” he said.
But if the central bank allows interest rates on government debt to rise to unsustainable levels before intervening, we will start the summer on a bad note, according to Lagrange. “You’re back to square one and the central bank will have to do something.”
“If you let the debt spiral, then you really are destroying what you just fixed. So we now need the ECB to do something else and the central bankers are nearly the only ones who can do something because the governments are all facing elections and trouble,” Lagrange said.
With the banks all looking to deleverage, they cannot be asked to buy unlimited amounts of sovereign bonds, Lagrange said. The ECB, on the other hand, can buy a lot of sovereign bonds, “so that’s what the central bank will have to do at some stage”.
The question, however, is when.
“The history is that they have been waiting and we’ve been trading the crisis as opposed to trading the solution,” Lagrange said.
He believes the ECB will have to restart its bond-buying program, known as the Securities Markets Program or SMP.
“LTRO III will lose quite a lot of power because we have had LTRO I and LTRO II," he said.
“If they do it too late at the end of the day we’re going to have problems with the euro that nobody wants to talk about,” Lagrange said.
There was no sure-fire way to make money out of trading the crisis, according to the GLG co-founder.
“We’re in a very similar environment to last year in July which means that you really want to try and stick to stock picking…You can’t really be long or short the market easily,” he said.
“You really have no visibility on when we’re going to get a resolution of the sovereign issue and it can take quite a long time and it can scare quite a lot of people,” he added.