A German central banker is urging European banks and fund
managers to hold cash in case their governments default.
In Europe, we have been witnessing debt haircuts and
other symptoms of sovereign overburden, Andreas Dombret, an executive board member
at Germanys Bundesbank, said Monday at the Annual
Conference on the Banking Union in Frankfurt.
Euro-area credit institutions do not need to hold any
capital against the default risk of their member states. This
is remarkable, since sovereign bonds account for a significant
part of bank assets in the euro area.
Dombret warned that without more stringent regulation,
a sovereign solvency crisis risks triggering a solvency
crisis at banks. He made his comments the same day that
the Hellenic Statistical Authority announced economic data showing
Greece returned to a recession during the first quarter.
Earlier this year, the International Monetary Fund noted
some of its concerns relating to Greeces debt levels. The
countrys 115 billion (about $126 billion) of tax
and social security debt to the state is by far the highest in
Europe, close to 70 percent of its gross domestic product, the
IMF said in a February report.
This excessively large debt burden weighs on the
balance sheets of companies and individuals, hindering
investment, consumption, and the resumption of growth,
the IMF said in the report.
In another sign of weakness in the Eurozone, Fitch Ratings
last month lowered Italys sovereign credit rating to BBB
from BBB+ rating. Fitch said in an April 21 report that the countrys track record
of fiscal slippage and weak economic growth were
partly to blame for its failure to bring down the very
high level of general government debt. This has left
Italy more exposed to potential adverse shocks, the
credit rater said.
British investors remain cautious on the outlook for
Eurozone sovereign debt.
Our long-term structural view on Europe is that it
needs to adjust quite meaningfully if its going to
survive in its current form, said James Vokins, a
fixed-income portfolio manager at Aviva Investors.