PIMCO’s Balls: Eurozone could benefit from Lehman moment

Leading European bond manager Andrew Balls of PIMCO believes the eurozone could benefit from a default scenario similar to what occurred with the Lehman Brothers bank.

The Euro Stars AA-rated Balls, brother to UK Labour shadow chancellor Ed Balls, said incumbent chancellor George Osborne’s point on the eurozone needing its Lehman moment, was ‘a very good one’.

‘A couple of years ago we talked about the break-up of the eurozone and people laughed, now no-one is laughing,’ said Balls, who runs a number of funds including the PIMCO GIS Euro Bond and the Allianz PIMCO Euro Bond Total Return funds.

‘Maybe we need a significant negative event. With Lehman I really didn’t think they’d default. Times that by 17 and that’s what you’ve got in the eurozone with all the brinkmanship and games of chicken.’

‘The worst day for the S&P 500 last year was the day the Greeks announced they were going to have a referendum, that’s where we are.’

However debt and deficits, he says, are not the issue affecting the region.

‘This crisis is not about an unsustainable level of debt, it’s about a co-ordination problem in the eurozone.’

And the current muddle-through cannot last as Balls argued there will be tipping points along the way, just like with Greece now. The US is keeping a close eye on the Greek election as Balls believes the decision over another round of QE is hanging on the outcome in Europe.

‘The market is pricing in a successful policy response, we will get QE3, but you have to ask yourself; what gets you to QE3? That’s a worsening of the crisis.’

‘The most likely scenario is that Greece exits the eurozone.’

To overcome these hurdles investors, Balls says, investors should protect themselves by getting out of the eurozone.

‘Head for cleaner dirty shirts and select EM countries for duration risk.’