Ignis Asset Management’s Stuart Thomson has identified five countries across Europe which could be the epicentre for the next leg of the region's financial crisis.
Ignis Asset Management’s Stuart Thomson has identified five countries across Europe which could be the epicentre for the next leg of the region’s financial crisis.
Europe’s problems have escaped from the front pages recently, but little has been resolved, with many economies struggling to cope with the strength of the euro, amid ongoing slowdowns and rising unemployment.
Thomson (pictured) believes economic conditions in Europe are more closely linked to rhetoric from the US Federal Reserve than to the region’s own central bank and its policies, and as a result is concerned comments on QE from the US could also impact the region.
He expects growth in Europe to remain disappointing and as a result the Ignis Absolute Return Government Bond fund, which Thomson co-manages, is currently short the euro in expectation of further pain to come in the region.
But where will the pain come from? Below Thomson has identified five countries in Europe that are most likely to cause the next leg of the crisis, listing a series of situations which may materialise after the German elections in September.
Thomson expects “more Greek tragedy” and said the country will need another bailout within the next 12 months.
He is concerned the IMF is limiting its participation in further Greek bailouts and is aware that the current bailout deal is unsustainable.
“Greek bond spreads have narrowed recently in line with other risk assets,” he said. “However, the faltering privatisation schedule means that further austerity measures will have to be imposed over the next couple of years.”
Cyprus is making similar mistakes to Greece, reflected in the IMF’s forecasts for the country, according to Thomson.
“By working backwards rather than forwards from the first bailout, the scale of contraction in the economy from bail-in of unsecured bank depositors and rapid forced contraction of the financial sector has been underestimated,” he said.
Economic stability in Italy is still under stress from the early elections, as the fragile coalition “remains vulnerable to the political machinations of Silvio Berlusconi and his overwhelming desire to avoid jail”.
With more political upheaval on the cards, Thomson said it is difficult to pinpoint the exact trigger for the collapse of the coalition, but said the slow pace of the economic recovery could well be the catalyst.