“There is too much debt in the world and if Greece defaults on its debt, this will be good for the markets in the short term, especially if it defaults big.”
That was the message we heard yesterday morning from Barry Allen of Marret Asset Management, considered by many to be the top manager of high yield bonds in Canada and one of the external managers we use for yield mandates.
Barry was in to give us an update and his view was uncharacteristically optimistic: “Now that the European Central Bank has put a floor under European banks with its 3-year loans, smaller governments can now default without bringing down the banking system.”
Barry contends that Greece and Portugal should, and will, default and this will be good for the overall global deleveraging that will continue for several years.
He also reminded us that Italy runs a structural budgetary surplus and has a strong industrial base that “makes good things people all over the world want to buy”, especially luxury goods desired by the growing affluent classes in emerging markets.
He thinks Italy will be successful in its efforts to crack down on tax evaders, citing the amusing anedote of the recent tax raid on the luxurious winter resort of Cortina D’Ampezzo. Tax inspectors found 42 top-end cars registered to people with declared annual incomes of 22,000 Euros (about $29,000 CAD). The investigation highlights the problem of tax collection in Italy, which Barry thinks will ultimately be resolved given the strong sense of nationalism and patriotism in that country; the upper middle class “will do their part to put the country back on sound fiscal footing.”
Barry’s overall message was that Europe is in better shape than the world has given it credit for. Not exactly a screaming ‘buy signal’, but still upbeat news for a grey January morning in Toronto.