Europe Has Not Had Its Financial Crisis: Asset Manager

Europe has not yet had its financial crisis while America is still recovering from its crisis in 2008 according to Jim McCaughan, the CEO of Principal Global Investors.


“Europe's debt crisis appears to be entering a more dangerous phase. If the EU and ECB continue pretending this is a liquidity crisis, they run the risk of allowing inadequate fiscal adjustment, particularly in Greece,” said McCaughan in an interview with CNBC on Monday.

“Debt levels are too high in the peripheral countries, so in the absence of rescheduling, or 're-profiling' as it is now being called, there will need to be a continued large subsidy from the taxpayers in the strong economies,” he said.

If no one is actually going to leave the euro zone, debt restructuring remains the most likely way out of this crisis according to McCaughan, who refuses to take denials from EU policy makers at face value.

“The impact of rescheduling on the financial sector would be severe, with recapitalization of many banks being necessary. In a sense, Europe has not yet had its financial crisis, though the US is recovering from its own,” he said.

“Another new element is Spain, where there is increasing populist pressure against austerity, and house prices are not yet clearing in the market, remaining perhaps 20 percent above trend. So solvency issues for the banking system seem likely to hurt government finances further,” said McCaughan.

US to Outperform Europe

Despite Friday’s weak jobs data McCaughan is confident about the prospects for the US economy despite what he sees as Washington’s failure to tackle America’s debt problem.

“For the rest of this year the US economic recovery is likely to continue, albeit at the relatively modest pace of 2.5 to three percent GDP growth,” he predicted.

“The recovery is being driven by manufacturing and technology, with the consumer remaining somewhat subdued and housing not recovering except in a few specific cities,” said McCaughan.

Predicting the need for tax hikes and spending cuts to get on top of the US national debt, McCaughan remains negative on the level of debate in Washington.

“I see the biggest risks here as being inaction caused by the polarized debate in Washington. I believe they need to get on with this,” he said.

“An excessively large public sector is now crowding out private sector job creation. Further delay or a failure to raise the Federal debt ceiling are serious risks,” McCaughan added.

“It seems likely that the Fed is at the end of QE, since lack of liquidity is no longer a problem for the US economy. The weak dollar policy may therefore be ending. Recovery in the dollar and some weakness in commodities seem likely.”

“US equities are attractive against an improving economic back ground. Volatility arising from European issues or commodity concerns creates a buying opportunity,” McCaughan said.