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`Liquidity Seizure' May Drag World Into Recession, Nomura's Schulte Says

A “liquidity seizure” arising from Europe’s worsening debt crisis could drag the global economy back into recession, according to Paul Schulte, head of multi- asset strategy in Asia excluding Japan at Nomura Holdings Ltd.

“As Europe’s problems unwind, liquidity is going to seize up. As liquidity seizes up, multiples are going to contract,” Hong Kong-based Schulte told reporters in Singapore today. “Equities are not necessarily cheap.”

Concern that Europe’s sovereign-debt crisis will spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. Global investors have little confidence in Europe’s efforts to contain the crisis, according to a quarterly poll of investors and analysts who are Bloomberg subscribers.

European Union leaders unveiled an almost $1 trillion loan package last month after Greece’s budget deficit expanded to almost 14 percent of gross domestic product, exceeding the EU’s 3 percent limit. Some European nations risk a “double dip” economic slowdown if the region fails to manage its debt crisis, the World Bank said today.

Investors withdrew some $12 billion from U.S. and European equity funds in the week to May 19, the most in almost two years, on concern Europe’s crisis will slow global growth, EPFR Global said on May 21. Global equity funds are slowly putting money back into the market, absorbing $1.5 billion of inflows in the week ended June 2, the Cambridge, Massachusetts-based research firm said this week.

Photographer: Seokyong Lee/Bloomberg

President of ECB Jean-Claude Trichet. Close

President of ECB Jean-Claude Trichet.

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Photographer: Seokyong Lee/Bloomberg

President of ECB Jean-Claude Trichet.

‘Liquidity Seizure’

“What we are having is a sort of liquidity seizure because of the dislocation in the euro,” Schulte said. “If we are not careful, that could tip us back into recession again.”

Schulte’s views contrast with that of the International Monetary Fund, which said yesterday the European debt crisis has been contained and that it still expects global growth of about 4.2 percent this year.

European Union governments this week vowed to police national budgets at an early stage and introduce a wider range of sanctions on excessive deficits to prevent a repeat of the Greece-fueled debt crisis that weakened the euro. They also pledged to press ahead with deficit cuts next year.

Still, Schulte said the euro may continue to slide as “debt restructuring in Europe looks inevitable.”

‘Double Dip’

The level of the euro, which has fallen 16 percent this year and is trading at about $1.20 today, “is not really a problem,” IMF Managing Director Dominique Strauss-Kahn said in an interview with Bloomberg Television in Istanbul yesterday, while noting that the pace of the depreciation may fuel concern.

Growing uncertainties about the fate of debt-saddled countries in Europe makes it a “little bit premature” to hunt for bargains at this stage, Schulte said. If the region fails to manage its debt crisis the impact could threaten countries from Central Asia to Latin America, the World Bank said today.

“We’re expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies,” Andrew Burns, the World Bank’s manager of global macroeconomics, said at a press briefing telecast from Washington today.

The MSCI Asia Pacific Excluding Japan Index of stocks has fallen 10 percent this year, dragging valuations to 13 times estimated earnings and 1.8 times book value, according to Bloomberg data. Schulte said valuations of 11 times estimated earnings and 1.5 times book value look more reasonable.

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

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