The man in charge of bond investment at Norway’s biggest bank said monetary stimulus would save the world — for now.
Next month, the European Central Bank (ECB) might step in to rescue the region’s “dysfunctional banking system,” DNB Asset Management fixed income head Svein Aage Aanes said.
“Many are a bit skeptical but I still think the central banks have some dry gunpowder left,” Aanes said on Thursday in an interview in Oslo. “The ECB can do much. This will calm down.”
The banking sector needs to be rescued, with yields now so high that lenders cannot issue subordinated debt, Aanes said.
Investors are counting on the ECB to “calm down” markets with rate cuts, more quantitative easing or again step in with specific measures for the banking system, he said.
However, the risk is that the “development becomes self fulfilling,” Aanes said.
Part of what is rattling global markets is a slowdown in China.
However, investors are underestimating the power of the Chinese government to steer the world’s second-largest economy through the turmoil, Aanes said.
“Against what normally would’ve been a clear bubble situation there’s a government in China that has completely different tools and the ability to intervene through regulations and capital controls,” he said. “It’s a terror balance between an unbalanced economy and a government with a big foreign exchange reserve and economic muscle.”
“If we think credit spreads will narrow because someone will clean up in this round, that’s a good investment,” Aanes said.
Central banks would at some point need to “break this loop” because markets are relying on “monetary experiments on a scale that has never been tested before,” Aanes said.
“What is the end game? I don’t have the answer. No one has,” he said. “The risk is obviously, if this doesn’t hold, a financial Armageddon.”
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