Policymaker indifference to the ECB’s Outright Monetary Transactions (OMT), coupled with a lack of structural reforms from peripheral European governments, means weakness will remain, he says.
He explains: “We are in a situation where Europe actually needs a crisis in order to reform. In the absence of reform, growth will continue to be weak and debt will continue to build, making a crisis sadly unavoidable at some point in the future.
“When the next crisis flares up is difficult to tell, but given the lack of progress in resolving the fundamental problems within the eurozone, such an escalation appears inevitable and warrants a cautious peripheral European exposure across credit funds.”
Bennett asserts that when the crisis does inevitably come, policymakers will have the opportunity to enact structural reforms and ultimately move towards full fiscal union. The only other viable choice, he says, will be to break up the eurozone.
He also explained how the ongoing bank asset quality review by the ECB and its associated stress test has been met with deserved scepticism given that a number of previous test failed to highlight problems at banks that subsequently got into severe difficulties.
Bennett agrees with sceptics on the OMT, designed to reassure current bondholders that they would be sage from market volatility or even outright default should a country get into funding difficulty.
“This logic suggests that a country shouldn’t get into funding difficulty, because there was no need for private bond holders to sell in the first place, but this is all really a confidence trick,” he asserted.
“The OMT remains a theoretical programme with many details yet to be ironed out as different policymakers interpret its conditionality in different ways depending on their personal bias. Indeed its very legality is yet to be tested with the European Court of Justice currently looking into the matter.
“If and when the OMT is actually needed, I suspect that there will be plenty of policymakers who are no longer keen on buying significant amounts of questionable sovereign debt.”
