Forget China. ‘Hard Landing’ in US, Europe: Strategist

Developed economies are still experiencing an economic “hard landing” after the credit crunch, despite data showing small increases in gross domestic product. As a result, investors should worry more about the West than about China, which is managing its slowdown, a currency strategist told on Tuesday.


Beijing announced recently that it has enough economic leeway to ease monetary policy, but it also introduced curbs to cool the real-estate sector. Those apparently mixed signals prompted some market watchers to say they were afraid of a sharp slowdown in the Chinese economy.

"The bigger cycle we’re experiencing [in the West] is the result of the bursting of the credit bubble [in 2007]," Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said in an interview. “This is what a hard landing looks like; I don’t know why people are so worried about China.”

If central banks in Europe and the U.S. “were attacking and managing the problem” when they noticed the bubble in the property markets, the crisis would not have become so deep, Gallo said. He added that central banks could have set up rules on who could or could not get loans and used monetary policy to cool the red-hot real-estate markets.

It will take a “very long” time for developed economies to get out of the hard landing phase as “it’s not just about deleveraging, it’s about credit channels not functioning,” he explained.

Some analysts have suggested that with the European Central Bank’s two liquidity-injecting operations (LTRO), in which around 1 trillion euros ($1.3 trillion) were loaned to European banks at a record low 1 percent rate for three years, the continent’s banking problems were over.

Gallo disagrees. “The banking system is still the Achilles’ heel in Europe. There’s no trust between banks at all," he said.

Europe's banks are “on life support,” dollar funding costs are high for them, and the level of deposits at the ECB — which have hit fresh highs — are signs of the troubles that financial institutions are still experiencing, according to Gallo.

Earlier this month, banks parked 777 billion euros ($1.02 trillion) at the ECB just two days after taking 530 billion euros in three-year, 1 percent loans from the central bank, and despite the fact that the ECB’s overnight facility pays an interest rate of only 0.25 percent.

“Without the ECB intervention, there would have been a banking crisis,” Gallo said.

Developed markets are too dependent on consumption and credit, and may be running “the wrong model of growth,” said Gallo, who believes that China and India are on the right path, even though they have a long way to catch up with the West.

“They have real income growth, we don’t,” Gallo said.