View the article online at http://citywire.co.uk/money/article/a614811
'We've seen the worst' in Europe, says Old Mutual's Lilley
European fund manager Kevin Lilley is keeping a cool head before next week's policy meeting at the European Central Bank.
Earlier this week markets were shaken from their summer lull when Spanish and Italian bond yields moved back towards their crisis highs.
The yield on the 10-year benchmark in both nations hit its highest level in two weeks on 29 August, with Italian debt rising to 5.85% and Spanish to 6.52%. This raised fears both countries were returning to the crisis levels they hit earlier this year, which saw yields past 7%.
The tension has subsided in Italy since, with yields falling to 5.76%, while Spanish debt has risen marginally higher to 6.598%.
Given what happened earlier this year it is understandable that alarm bells were ringing once again.
Lilley said: ‘I think we’ve seen the worst of the newsflow. It’s very difficult to see the news getting worse than it was in the second quarter of this year when you had European politicians arguing head to head while Greece was having great difficulty forming a government.
‘From here I think things stand a chance of improving, bearing in mind we’ve got the events in September such as the ratification of the (European Stability Mechanism) ESM by Germany and hopefully the resolution of the Spanish banking bailout programme. Then hopefully that will start to restore business and consumer confidence, which will allow the economy to start recovering.’
The Spanish problem
With regards to Spain, Lilley expects yields to fall over time as the reforms made by the nation’s government start to take effect.
'The Spanish government needs to make strategic decisions to improve the competitiveness of the workforce. Labour costs rose to be among the highest in Europe, and that clearly wasn’t sustainable,’ Lilley said.
‘Some of the reforms that are being put in place at the moment are there to bring down those labour costs, to make Spain a more competitive nation. The bond market will like those kind of measures and gradually yields will start to fall.’
Lilley also believes that if the Spanish bank bailout programme is completed the pressure on yields will ease.
‘At the moment we’re waiting until September for the results of an independent audit on Spanish bank liabilities in the property sector.
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