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Rothschild Warns on Deflation as Conference Focuses on Risks

Investors need to be wary of deflationary pressures in the global economy as it recovers from the worst recession since World War II, said money managers and former policy makers at a Bloomberg Link conference in London.

“The odds are much more on deflation than they were a few months ago,” multimillionaire U.K. financier Jacob Rothschild told the conference. “We are in for a period of trying to deliver the minimum. We should forget thinking about making a lot of money over the next year.”

The comments came one day after the Federal Reserve said “underlying inflation has trended lower” in the U.S. and as leaders from the Group of 20 nations head to Toronto to debate the timing of austerity measures needed to cut budget deficits. Portuguese and Greek officials told the conference that their governments will restore investors’ confidence, even as the cost to insure Greek debt against default jumped to a record today.

Credit-default swaps on Greece rose 38 basis points to an all-time high of 970 basis points, according to CMA DataVision. Contracts on Portuguese government securities climbed 16 basis points to a two-week high of 336.5. U.S. stocks slid for a fourth day, partly on concern about Greece, with the Standard & Poor’s 500 Index declining 1.3 percent to 1078.11.

Rothschild’s remarks chimed with those of economists and other investors at the “Sovereign Debt Briefing” conference, who warned the euro area is not yet free of the debt crisis that began in Greece and rattled economies from Spain to Ireland.

Growth Cap

The combination of debt turmoil and subsequent fiscal austerity will put a “cap on growth” and fan deflation, said Jan Szilagyi of Hawker Capital LLP.

Some investors said it’s still possible to profit from deflationary pressures in the European economy.

“For the euro to succeed it needs deflation to address the lack of competitiveness in countries like Greece and elsewhere,” said Hugh Hendry, who manages $420 million as co-founder of Eclectica Asset Management in London. “If that is your premise, you need to be long German 30-year bonds.”

Those securities, which currently give investors a return of 3.35 percent, will eventually yield less than 2 percent, he said.

Rothschild said with few currencies worth buying, about 10 percent of RIT’s assets were in gold, the most ever. RIT had net assets of 1.8 billion pounds ($2.7 billion) at the end of March.

Troubled Times

“In these troubled times it’s a sensible spreading of risk,” he said.

His pessimism was offset by Stanley Fink, the former chief executive of Man Group Plc. “There are reasons to be a bit more optimistic,” he said, adding that the euro may eventually split into a “two tier” currency system that would help solve its current woes.

Former U.K. Chancellor of the Exchequer Norman Lamont focused attention on the size of the U.S. budget deficit, arguing that the world’s largest economy may be “living in a fool’s paradise” by not starting to cut its shortfall.

“It’s right to be cautious, pessimistic about the outlook for the world economy,” said Lamont, who was finance minister when the U.K. was forced out of the European Exchange Rate Mechanism in 1992. “The Americans are not facing up to the problem they have.”

Debt Load

Governments are at odds over when to start trimming a G-20 debt load that the International Monetary Fund estimates will average 110 percent of gross domestic product in 2015. Current U.K. Finance Minister George Osborne on June 22 announced the country’s deepest cuts since World War II in a bid to convince investors that the U.K. won’t suffer Greece’s fate. The U.S. argues that governments shouldn’t risk pushing the global economy back into recession.

European officials played down the threats to their own economies from debt burdens even as the region’s stocks retreated for a third day amid concern that the sovereign debt crisis may derail the economic recovery. The benchmark Stoxx Europe 600 Index dropped 1.8 percent to 249.94 points.

Carlos Costa Pina, Portugal’s secretary of state for treasury and finance, said in a Bloomberg Television interview he’s confident the government will reach its budget deficit and maintained his economic growth forecast of 0.7 percent this year.

Petros Christodoulou, head of Greece’s debt agency, said the country’s European Union loan package is giving his country leeway to focus on its fiscal-consolidation measures and there’s no reason to expect a default. Moody’s Investors Service cut Greece’s credit rating by four steps to junk on June 14, citing “substantial” risks to growth from austerity measures.

“The package we received gives us the luxury not to think about it at this stage,” Christodoulou said, referring to potential future debt sales. “No one at the moment is looking at a restructuring in Greece, no one in Greece, no one outside Greece.”

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