'Financial repression' could save Europe, says Standard Life
To escape the "sovereign debt trap", highly indebted nations must implement 'financial repression' policies to erode the real value of their national debt, says Standard Life Investments.
'Financial repression' is a term that was coined in the 1970s, and was later used to disparage the policies adopted by emerging market financial systems in the 1980s. It has also been used to describe the policies of many developed nations in the period following the Second World War.
Financial repression involves the implementation of policies that compel banks, and sometimes pension funds, to lend funds to the Government at 'below market' rates.
It is often accompanied by real or implicit caps on interest rates, effectively creating an implicit tax on savers and eroding Government debt.
The big debtor nations must also put growth policies in place to raise GDP, according to Standard Life Investments global investment strategist Richard Batty - although he adds that not all countries will be successful.
But there are more immediate concerns for the big debtor nations, he warned.
"Of the big six debtor nations, four are likely to see up to a quarter of their debt roll over by the end of 2012. In some cases this will require emergency liquidity provisioning from their central bank," said Batty.
The UK and Germany are likely to escape the sovereign debt trap, and the fact that the US issues the world's trading currency has so far "placated investor concerns", Batty said.
However, he predicted serious sovereign debt problems ahead for Italy, Japan and, to a lesser extent, France.
Investors are also concerned about potential sovereign defaults and credit rating downgrades, which could lead to a 'buyer's strike', warned Batty.
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