Chahine: US debt ‘just as explosive’ as eurozone’s

Veteran French manager Jacques Chahine is warning investors not to overlook the gravity of the US’ debt problem despite positive signs of a recovery in the world's economic superpower.

In his latest investment outlook, Chahine said while we are still waiting for a durable solution to the eurozone crisis investors' should not pin their hopes on the US.

‘Very little is mentioned about the risk of American debt, except during the political stalemates that produce a few trillion more of it, said Chahine, who runs the Digital Funds Stars Europe fund. 'Treasury bonds are highly sought-after at the moment because they are thought to offer safety in a chaotic world.’

‘Even so, US government debt has just exceeded 100% of GDP and the budget deficit amounts to over 10% of GDP, compared with averages of 80% and 6.4%, respectively, in the eurozone, although we accept that the problem with the eurozone is that it is not a real economic unit and that the crisis originated in differences between Member States, not overall budgetary or debt levels.’

Explosive debt

Chahine warns that investors should keep a close eye on developments in the US despite signs of a recovery in its economy.

‘America’s debt problem is also explosive, but the Fed has opted to stimulate the economy first and mop up excess debt afterwards. Europe and the UK have taken the opposite approach, meaning heavy doses of austerity.'

‘The future will tell who got it right. Signs of recovery are evident in America, notably in the labour market. This has not yet affected the world economy, which is expected to decelerate markedly in 2012.’

‘America has started an election year, and although this makes structural reform unlikely it also ensures that the US authorities will do all they can to prevent a major European crisis that could sway voters at home.’

Cutting equities

The French manager said that given the widespread uncertainty and mediocre prospects for economic growth he has decided to reduce his exposure to equities in 2012.

Data from the US had been disappointing, he said off the back of below-forecast fourth quarter earnings announcements.