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Aug 06, 2012, 02.48 PM IST
The European Central Bank will have to go ahead with bond buying, says Martin Hennecke, Tyche Group.
The European Central Bank will have to go ahead with bond buying, says Martin Hennecke, Tyche Group. "If they don’t buy bonds, Spain will not be able to survive the next two months. They will not be able to refinance themselves," he adds.
He expects a massive inflationary problem coming out of Europe and the United States. "That’s one of the reasons why we still like gold a lot and tangible investments of any kind," he adds.
Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar.
Q: What’s the street expectation about the possibility of ECB going ahead with bond buying?
A: They have to. If they don’t buy bonds, Spain will not be able to survive the next two months. They will not be able to refinance themselves. They can’t pay 7% 10-year bond yield. But the problem is actually they can’t even pay 6%. So, they will really have to be buying a lot of bonds, both Spanish bonds and Italian bonds. Even if Germany wanted to support that, all of Germany’s money, the money that they would have available, anyway still wouldn’t be enough because Italy has got 2 trillion and in the Spanish banking system there has much more bad debt than people think.
In our view, only massive money printing out of thin air, so basically very inflationary quantitative easing or bailout policies from the ECB could avoid a default of those countries. That means the euro potentially could sink much further or see very high inflation as by the way may as the US dollar see the same problem because the US debt situation is much better than that of Europe. So, we expect ultimately a massive inflationary problem coming out of Europe and the United States. That’s one of the reasons why we still like gold a lot and tangible investments of any kind.
Q: You are not going to buy into the current rally that we are seeing in the US and maybe European markets as well. Will you sell into this rally at all?
A: We will sell into the bond rally. We don’t have any Italian and Spanish bonds. But we would definitely suggest investors, who may have any, to sell into that bond rally. If you are talking about the equity markets, I just mentioned we actually like tangible assets of any kind and equity, to some extent, do represent tangible assets.
As the crisis is getting worse and may affect the major countries going from Spain to Italy to France to Germany to the United States and as these countries eventually see the only way out of their own debt crisis and the weaker countries’ debt crisis in this massive money printing, you may then see the current safe havens of these sovereign bonds becoming the new high risk. Cash and bonds have no intrinsic value. So, they rely on government’s not printing money. And then the new safe haven may be gold, to some extent, commodities and to some extent equities.
But we are not a fan though of stocks very much in Europe or the US, we prefer more Asia. But stocks may not be the hardest hit going forward, it maybe bonds.
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