The ECB Will Rescue Europe…Eventually: Analyst
Assistant News Editor, CNBC.com
As Spain announces further austerity measures in the face of a forecast of 0 percent growth in 2013, the country needs “unequivocal support” from Europe, Patrick Armstrong, Managing Partner at Armstrong Investment Managers, told CNBC.
Spain’s Prime Minister Mariano Rajoy said on Tuesday that his country will cut public sector jobs, privatize national transport assets and apply further austerity measures. Armstrong told CNBC’s “Worldwide Exchange” that he believed the announcements were a “precursor to some sort of [European]funding”
“There may be a resumption of a securities markets program purchasing Spanish bonds,” he said, as long as there was European support for the country and some “financial oversight, whether that be by some EU member, and also fiscal integration, so Germany feels comfortable”.
The subject of fiscal oversight was high on the agenda at the recent EU summit where euro zone leaders agreed to allow the EU's rescue fund, the European Stability Mechanism, to directly inject aid into Spanish banks from next year and that funds could be used to stabilize bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measures or economic reforms.
The deal had been struck after both the Spanish and Italian Prime Ministers, Rajoy and Mario Monti respectively, had withheld their support for a 120 billion euro ($149 billion) growth package until europe paymaster Germany had agreed a deal to ease their immediate borrowing costs.
Armstrong told CNBC, however, that he believed Spain could do without the 100 billion euro ($125.3 billion) cash injection into its ailing banks that was agreed to at the EU summit (but it yet to be finalized).
“I think Spain actually could manage without aid for its banks, if it had unequivocal support —[knowing] that they would be supported, should they need it — and then then that would push Spanish yields down and the rest of the country wouldn’t be on a hook right away. But you’d had to provide that unequivocal support.”
However, “crisis is needed to make sure everyone is motivated to get to that end-game that everyone knows has to happen,” he said.
Spanish 10-year bond yieldsare peaking at around 6.81 percent on Wednesday, a rate that Armstrong said made the country appear to be on the brink of collapse to markets and investors.
“You’ve got to get Spain down to 4 percent to be viable…anything around 6-7 percent and people are worried about the imminent collapse of the euro zone, the Spanish economy and the fiscal situation.”
A week ago, the ECB cut interest rates to zero in an attempt to help countries such as Spain and Italy with high borrowing costs but it ruled out stronger measures to shore up the ailing euro zone economy such as injecting more liquidity into banks and buying government bonds. That move that disappointed some investors and the IMF , whose Managing Director Christine Lagardehad urged the bank to resume its purchases of government bonds.
Armstrong said that his company believed that the ECB would become more proactive - once it could see that European governments had a “road map” to a solution.
“Once they [the ECB] see that national governments have a road map to the solution, the ECB can get much more pro-active. They can start to do the quantitative easing explicitly rather than just theLTROs (long-term refinancing operations). You need a very weak euro, you need the periphery to become competitive globally and there’s no way you can do that with a strong euro. The printing of money is going to be part of the solution for the euro zone as well.”
Armstrong added that Armstrong Investment Managers was optimistic that the single currency would survive the crisis.
“We don’t believe that the euro zone is going to fall apart. We believe that it will get to that solution eventually”