Bloomberg News

Germany Will Make Concessions to Protect the Euro, Pioneer Says

June 05, 2012

German Chancellor Angela Merkel

German Chancellor Angela Merkel. Photographer: Jock Fistick/Bloomberg

German Chancellor Angela Merkel will probably give in to calls from European partners for more growth measures and a more active role for the European Central Bank in protecting the financial system, according to Pioneer Investments Group Chief Investment Officer Giordano Lombardo.

“At the end, Germany will accept more macro coordination, more inflationary policies when the other countries are deflating and a more active role of the ECB in protecting banking systems of solvent countries,” Lombardo said in an interview on June 1 from Milan, where he oversees about $195 billion of investments globally.

Spain’s banking crisis and concern Greece may exit the euro reignited Europe’s debt crisis after the European Central Bank earlier this year calmed markets with its long-term lending program. President Barack Obama last week blamed European leaders for slowing U.S. job gains, saying they haven’t done enough to resolve the crisis, now in its third year.

Italian Prime Minister Mario Monti and French President Francois Hollande have challenged Merkel to get a euro-area debt sharing system in place. Spanish Prime Minister Mariano Rajoy on June 2 called for a “banking union” in Europe involving a centralized system to re-capitalize troubled banks.

Merkel the same day toughened her opposition to regional debt sharing, telling members of her party that “under no circumstances” would she agree to euro bonds.

Still, as euro-area unemployment reached its highest level on record and manufacturing and services output contracted in May, “there will be concessions from both sides,” said Lombardo. “We’ll have a more pro-growth stance from Germany and on the other side countries such as Italy, Spain and Portugal will continue to make a commitment towards fiscal discipline.”

G-7 Response

Finance ministers and central bank governors from the Group of Seven economies agreed yesterday to coordinate their response to the euro area’s sovereign-debt crisis on a conference call.

G-7 officials said they will work together to help Greece and Spain place their public finances on a sustainable footing, Japan’s Finance Minister, Jun Azumi, told reporters in Tokyo following the call.

Greece will hold elections again on June 17. Lombardo said it’s “absolutely possible” that the Mediterranean nation will “vote itself out” of the euro.

A chaotic exit would prompt Pioneer to “reduce significantly exposure to risk, primarily starting from equity, which is more liquid,” he said. In a coordinated Greek euro exit, his preferred asset allocation wouldn’t change much, as the market would actually “clear up part of the uncertainty.”

Even if Greece exits the single currency, “our base scenario is that the euro system will stay together,” he said. “There is also a possibility that just a few things will improve on the policy front and this will have a massively positive impact on the market.”

Underweight Bonds

Pioneer, a unit of Italy’s biggest bank UniCredit SpA (UCG), has held more European corporate bonds than are represented in indices, only reducing its overweight exposure in the past few weeks. It also kept an underweight position on European government bonds as a whole, with the exception of Italy, where he said the right measures have been taken to sustain public debt in the long term.

“In a scenario in which there is no euro breakdown, credit is a good investment opportunity in a very low growth environment, default rates are acceptable, not particularly worrying,” he said.

Regarding the recovery of the European financial industry, he said debt is a better choice than bank equity.

Outside Europe, Pioneer also has an overweight position on emerging markets bonds and equities.

“We don’t believe that they are completely sheltered from the European crisis but we believe that emerging market countries still have room for relaxing their policies; China has room to change both its fiscal and monetary policy to avoid a hard landing.”

To contact the reporter on this story: Marco Bertacche in Milan at

To contact the editor responsible for this story: Jerrold Colten at

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