Bill Gross’ latest message to investors - don’t put your money into Europe because they are not going to get out of their debt crisis any time soon.
Gross, Founder and Co-Chief Investment Officer of Pimco, manager of the world’s largest bond fund, wrote in an editorial in the Financial Times on Monday that the ultimate aim of European leaders is to get their hands on private-sector money because they know they will need it to fund the European economy. The current public-spending program is not sustainable and efforts to fix the debt crisis have been, and will be, futile, he said.
Policymakers in Europe now face an unprecedented expansion of risk spreads and credit agency downgrades which “almost guarantee that sickbed countries can never be discharged from intensive care,” he added. He warned investors not to part with their money.
“Investors get distracted by the hundreds of billions of euros in sovereign policy checks, promises that make for media headlines but forget it’s their trillions that are the real objective,” Gross wrote. “Even Mr Hollande in left-leaning France recognizes that the private sector is critical for future growth in the EU. He knows that, without its partnership, a one-sided funding via state-controlled banks and central banks will inevitably lead to high debt-to-GDP ratios and a downhill vicious cycle of recession.”
“Psst…investors: Stay dry my friends!” Gross said.
The crisis in Spain and Italy looks unlikely to be resolved soon and investors focusing on the 7 percent yields in their sovereign bonds may be missing the point, Gross wrote. Europe may not be able to bring yields down to 4 percent, and even if they could, it wouldn’t be enough to get Spain and Italy out of financial trouble, he said.
“Interest rates over and above each country’s nominal GDP growth rate will inevitably add to a country’s debt as a percentage of GDP , even if budgets are in primary balance,” he said. “At current yields, growth rates, and deficits, the spread may incrementally add 2-3 percent to Spain and Italy’s tenuous debt ratios every year.”
If GDP growth remains close to flat, the two nations will still drown in debt even if they have to borrow at 4 percent. And without the private sector’s participation, all efforts such as the European Financial Stability Facility and ultimately the European Stability Mechanism, will be futile, he said.
Gross added that European policymakers have lost trust among investors with half-baked policies, and credit rating agencies’ downgrades are also forcing them to seek safer returns elsewhere.
“And after policymakers finally appreciate the fragility of their rigged fiscal and monetary system; after all of that – there is no coming home, there is no going back in the water,” he said.
— By CNBC’s Jean Chua.