Michael Platt, founder of hedge fund BlueCrest Capital Management LLP, said European Central Bank President Mario Draghi’s plan to buy government bonds fails to address the underlying problems in the region.
Draghi’s proposal for so-called Outright Monetary Transactions will buy time for the region, though it won’t strengthen the region’s economy, Platt said today in an interview on Bloomberg Television’s “Market Makers” with Stephanie Ruhle.
“We need to not be confused between liquidity fixes and insolvency problems,” Platt said. “Europe has no credible plan for growth.”
Draghi, seeking to stem the European sovereign-debt crisis and safeguard the euro, has proposed buying government bonds, a plan that has been criticized by Germany’s Bundesbank as tantamount to printing money to finance governments, which is prohibited by the ECB’s statutes. Draghi today addressed the German parliament in Berlin to win popular support for his plan.
Platt’s comments were echoed today by Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., who said policies by the U.S. Federal Reserve and the European Central Bank aren’t sufficient to reestablish economic growth on their own.
Without the assistance of politicians and other policy makers, the Fed and the ECB can’t restore growth, employment and debt sustainability, El-Erian said today in remarks for delivery at the Economist’s Buttonwood Gathering in New York. The costs of witholding support could include the distortion of the normal functioning of markets and the implosion of certain areas within the financial services industry, he said.
“The longer central banks are left carrying the bulk of the policy burden, the more likely that the intended benefits of their actions will be countered, first partially and then fully, by collateral damage and unintended consequences,” said El-Erian, who is also the co-chief investment officer of Pimco.
Platt said that like the long-term refinancing operation by the ECB, the direct asset purchases seek to address the solvency problem of some European countries by providing liquidity. As economic growth remains subdued, policy makers will continue to print money without addressing the underlying economic issues, he said.
The International Monetary Fund earlier this month cut its euro-region growth forecast for next year to 0.2 percent from 0.7 percent and said the economy may shrink 0.4 percent this year as governments cut spending.
Platt said the bond purchases are calculated to instill confidence in the debt markets of Spain and Italy. While the moves have driven down the cost of financing in Spain, the nation will “undoubtedly” have to ask for more money.
Platt said he doesn’t like the debt of Mediterranean countries, who may have trouble paying back their obligations.
“I don’t like lending money to people that ultimately are going to have difficulty repaying,” he said.
Equities might be the only investment alternative as short-term bond yields remain low and commodities haven’t performed well this year, Platt said.