Monetary easing sign of tighter fiscal union, says DWS CIO

Euro member commitment to supporting Portugal, the second eurozone country to be downgraded to junk status, is clear from bond buying and liquidity measures by the European Central Bank, said Asoka Wöhrmann, CIO of the asset management arm of Deutsche Bank, DWS.

‘Next year we will be talking about the sustainability of the G4 balance sheets but for the moment this has to be part of the process for growth in the peripheral Europe,’  said Wöhrmann who would still rather buy Italian bonds than bunds.

Market intervention by the ECB to avoid sovereign default and a banking crisis is a commitment towards ‘debt mutualisation’, he said.

Portuguese bond yields had seen new highs this week even after the €489 billion injection from the European Central Bank last December.

The country however sold debt at lower costs yesterday after the ECB bought the country’s below-investment-grade sovereign bonds earlier in the week.

Found in translation

A ‘political commitment to avoid a second Greece – as long as the Portuguese behave correctly’ was reiterated by Euro leaders at the summit this week said Wöhrmann, who believes that the turning point was as early as July last year when Euro leaders committed to sustaining financial sustainability amongst  most-indebted member states.

‘The European communiques are like understanding a puzzle.'

'Politicians are hardly explaining to voters what they are doing,’ he added with reference to monetary easing. ‘Much is going through back doors.’

‘Game changing’ money supply

The ‘big game changer’ for Europe this year is looser monetary policy, said Wöhrmann.

The mass bank lending from the ECB last year allows banks in the most indebted countries to borrow at much lower costs than they lend.

‘Through lending cheap money over a long period of time, you can see commitment towards ‘debt mutualisation’ for across the euro area,’ Wöhrmann said.

As a result, according to Wöhrmann, this could see some banks in profit by the end of the tender boosted by ‘cheap’ money.
 
January 2012 has already seen the US Fed commit to leaving rates unchanged until 2014. The European Central Bank is expected to announce a second mass loan to European banks by the end of this month.