Aegon manager warns of possible knock-on effect from struggling European countries
Aegon’s Melanie Mitchell warns the financial problems of Greece and other countries could lead to a systemic infection of the European banking system.
The fixed income manager believes if struggling countries, such as Greece, default on their external debt it could have a knock-on effect on the bond holders, with banks in Germany, France, the UK, Switzerland and the Netherlands bearing the brunt.
If such defaults were allowed to happen, says Mitchell, banks in those economies would likely have trouble funding themselves, either via deposits or in the wholesale markets, because of a lack of confidence in the banking system.
This could lead to default by those banks, which would lead to systemic infection of the European banking system, she says.
There would also be a detrimental effect on non-financial corporates that are dependent on their economies, warns Mitchell.
“Clearly, the austerity measures adopted by these economies in addressing their budget deficits will bring with them a certain amount of economic pain, as either spending is curbed or taxes are raised,” Mitchell says.
“If this derails their economic recovery, the trading partners of those countries, or the companies dependent on their economies, will suffer.
“If this situation were to unfold, all risk assets would be detrimentally impacted, not just bonds.”
However, while she expects sovereign debt to remain unsettled, Mitchell remains positive and believes sovereign default can be avoided.
“As other European economies begin their own long, slow recovery, they are not likely to allow the weaker economies to hold them back,” Mitchell says.
“So while we expect continued volatility in sovereign debt, and therefore credit spreads, we remain constructive on credit.
“We believe an internal solution will be found by other EU member states and sovereign default will be avoided. As a result, we do not expect corporate defaults to rise as a direct result of the current sovereign troubles.”
