“Defaults are going to happen”, said Leaviss, speaking at a Morningstar Investment Conference earlier today. “Countries do default all the time – if anything this has been a very quiet period”, he said, citing the study of such trends by US economists Carmen Reinhart and Kenneth Rogoff.
Ireland, and even other beleaguered eurozone nations such as Greece and Portugal, should “renege on all debts and default”, according to Leaviss. “If I were a member of the Irish population I’d demand a default because they have no chance of growing their way out. The same goes for Portugal and Greece”.
One reason for this belief is what Leaviss sees as the fallacy of countries inflating their way out of trouble. His particular example in this regard is the US: “government outgoings are implicitly linked to inflation”, he said, citing not just the likes of welfare costs but also, crucially, the interest rate on US debt.
“This rate is currently 2.5%. Generating inflation could cause that to rise to 4% or 5% and that would lead to downgrades or even default. The same goes for other developed markets”, he said.
Leaviss said last month’s decision by S&P to downgrade it outlook on US debt was no surprise, given the country’s precarious fiscal position, and repeated his assertion that the US will eventually lose its AAA rating altogether.
The M&G manager suggested a third round of quantitative easing – QE3 – would prompt a collapse in the dollar, but does not see such policy action as likely. Nonetheless, he believes the prospect of a plunge in the currency “doesn’t concern the Federal Reserve in the slightest”.
“The US is behaving like an old school, emerging market banana republic”, he said, noting that a significant proportion of its debt will mature in the next five years. By contrast, it is the UK that should give advisers more of a “warm and fuzzy feeling”, Leaviss advised, because it has learned the lessons of the buyers’ strike seen in the mid-1970s and focused its borrowing around long-dated issuance.