Fund managers expect more trouble in Germany

Wednesday, July 18, 2012
By Paul Martin

Fund managers from across the world have begun to doubt Germany’s ability to withstand further shocks from the region’s debt crisis, registering a stark change in view since the late spring.

By Ambrose Evans-Pritchard
TelegraphUK
17 Jul 2012

The monthly survey of funds by Bank of America Merrill Lynch has picked up a sudden crumbling of confidence in the eurozone core, with France viewed as the country most likely to deliver a nasty surprise later this year. Europe’s debt crisis is by far the biggest worry worldwide, with the US “fiscal cliff” and China’s property slide well behind.

A net 32 of money managers expect trouble in Germany, a dramatic reversal since May. The worries may be linked to the Bundesbank’s rocketing claims on eurozone central banks under the ECB’s “Target2” payment system, now €729bn (£572m). These reflect the scale of capital flight from the Club Med bloc, and may prove hard to collect if the euro blows apart.

A net 55pc expect a bad surprise from France, which has $710bn (£456bn) of bank exposure to Club Med. President François Hollande is courting fate by raising the minimum wage, employing 60,000 new teachers and clinging to a largely unreformed state that takes 56pc of GDP.

While investors seem willing to overlook the leisurely pace of fiscal tightening, they may be less forgiving of Mr Hollande’s nonchalance over France’s relentless loss of global competitiveness.

The growing doubts about Germany and France have not yet surfaced in the debt markets. Short-term borrowing costs have turned negative in both countries. The immediate flight to safety has overwhelmed all other effects.

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