LONDON, March 16 (Reuters) - Italy remains a long-term challenge as the euro zone moves out of the stimulus era because of its high public debt levels, PIMCO’s chief investment officer Andrew Balls told Reuters in an interview.
Balls, who oversees the European, Asia-Pacific, emerging markets and global specialist investment teams for PIMCO, the world’s largest bond investor, said if there’s a recession in Europe in the future, Italy will be his focal point.
“If you have a recession and a deterioration in terms of fiscal metrics, you have ECB out of QE by that point ... you could have a rerun of a lender of last resort type crisis,” he said.
He was referring to the European Central Bank’s role as a lender of last resort in the event of a financial crisis, exercised most notably in the aftermath of the 2008 global financial crisis and euro zone debt crisis of 2010-2012.
“Hopefully that doesn’t happen but seems like a reasonable risk and while some countries will have made changes in terms of their domestic policy, Italy remains a challenge given its high public debt levels,” he said.
He warned as well that the euro zone’s financial and policy framework could come under threat again if the region plunges back into recession.
“Overall there’s hasn’t been much progress in terms of the architecture of the euro zone,” he said.
Balls said he does not believe that the start of a secular bear market in bonds is underway. Even in the case of inflation surprising on the upside, bond yields are unlikely to rise much.
“If you think in the next recession there’s a reasonable chance that central banks will be forced to do QE (quantitative easing), then that reinforces our expectation for global fixed income markets to be broadly range bound,” he said.
“At the moment we are a little bit underweight duration in our portfolios, we think there’s a chance that yields go a bit higher. But do we think we are at the start of a secular bear market? No.”
Worries over U.S. President Donald Trump’s tariffs and the potential for a global trade war has affected markets around the world in recent days, including pushing the U.S. dollar lower.
But Balls said he believes factors other than trade wars affect the outlook for the greenback - and that the currency could even benefit if trade tensions start affecting economic fundamentals.
“(It is) a little bit like the U.S. getting downgraded a few years ago was a dollar positive event because of the flight to quality into U.S. assets,” he said. (Reporting by Abhinav Ramnarayan, Additional reporting by Saikat Chatterjee, Dhara Ranasinghe and Ritvik Carvalho; Editing by Toby Chopra)