World Business

'Liquidity seizure' could restart recession

By Jonathan Burgos (China Daily)
Updated: 2010-06-11 10:52

IMF Managing Director Dominique Strauss-Kahn arrives at a meeting in Luxembourg. He said that the level of the euro, which has fallen 16 percent this year, "is not really a problem". [Bloomberg]

SINGAPORE - A "liquidity seizure" arising from Europe's worsening debt crisis could drag the global economy back into recession, according to Paul Schulte, head of multi-asset strategy in Asia excluding Japan at Nomura Holdings Ltd.

"As Europe's problems unwind, liquidity is going to seize up. As liquidity seizes up, multiples are going to contract," Hong Kong-based Schulte told reporters in Singapore on Thursday. "Equities are not necessarily cheap."

Concern that Europe's sovereign-debt crisis will spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. Global investors have little confidence in Europe's efforts to contain its debt crisis, according to a quarterly poll of investors and analysts who are Bloomberg subscribers.

European Union (EU) leaders unveiled an almost $1 trillion loan package last month after Greece's budget deficit expanded to almost 14 percent of gross domestic product, exceeding the EU's 3 percent limit.

Investors withdrew some $12 billion from US and European equity funds in the week to May 19, the most in almost two years, on concern Europe's sovereign-debt crisis will slow global growth, EPFR Global said on May 21. Global equity funds are slowly putting money back into the market, absorbing $1.5 billion of inflows in the week ended June 2, the Cambridge, Massachusetts-based research firm said this week.

"What we are having is a sort of liquidity seizure because of the dislocation in the euro," Schulte said. "If we are not careful, that could tip us back into recession again."

Schulte's views contrast with that of the International Monetary Fund, which said on Wednesday the European debt crisis has been contained and that it still expects global growth of about 4.2 percent this year.

EU governments this week vowed to police national budgets at an early stage and introduce a wider range of sanctions on excessive deficits to prevent a repeat of the Greece-fueled debt crisis that weakened the euro. They also pledged to press ahead with deficit cuts next year.

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Still, Schulte said the euro may continue to slide as "debt restructuring in Europe looks inevitable".

The level of the euro, which has fallen 16 percent this year and is trading at about $1.20, "is not really a problem," IMF Managing Director Dominique Strauss-Kahn said in an interview with Bloomberg Television in Istanbul on Wednesday, while acknowledging that the pace of the depreciation may fuel concern.

Growing uncertainties about the fate of debt-saddled countries in Europe makes it a "little bit premature" to hunt for bargains at this stage, Schulte said.

The MSCI Asia Pacific Excluding Japan Index of stocks has fallen 10 percent this year, dragging valuations to 13 times estimated earnings and 1.8 times book value, according to Bloomberg data. Schulte said valuations of 11 times estimated earnings and 1.5 times book value look more reasonable for Asian equities.

Bloomberg News