COVID CRISIS: does the economic contraction we have witnessed over the last year expose the market to risks arising from the development of a new giant "debt bubble" accrued by both states and companies?
The need to support the economies hit by the Covid crisis has effectively forced governments around the world to inject massive doses of liquidity into the economic system, supporting employment and preventing widespread business failure scenarios.
Although this liquidity has been raised through debt, we can identify at least three different debt models that are extremely different from each other, as are the implications for the risk of a credit bubble.
In the USA, the government has been able to count on massive intervention by the central bank, which has effectively 'monetised' T-bond issues by injecting over 3 trillion of liquidity into the system in the first half of 2020 alone. This debt is a pure roundabout because it is not repayable and does not create any pressure on rates. For this reason, it is highly sustainable.
In Japan, the government mainly relied on private savings, thanks to which it placed massive amounts of public debt. As a result, Japan has been able to exceed the 260% ratio of public debt to GDP without any rating agency raising default risks and without interest rates being affected. This debt, like that of the US, is also sustainable, as it could theoretically expand indefinitely, relying on a revolving door of residents' savings.
In Europe, on the other hand, with a few exceptions, government bonds have been placed mainly on the open market, i.e. to institutional investors, investment banks and pension funds. This form of borrowing is possible as long as creditors provide money. In addition, these securities increase the size of the secondary market and favour the growth of the spread, leading to a problem of sustainability and the country's dependence on the decisions of large international financial groups. Recently, in fact, the rating agencies have clearly absolved Italy (temporarily) only thanks to the recognition of the role of the ECB, which has shown interest in buying Italian Treasury bonds. But it is quite clear that as soon as this willingness fails, the country will find itself hostage to the markets, as well as the various credit institutions, and moreover with a level of public debt/GDP much higher than in past years.
COVID crisis: in your experience, what will be the next scenarios?
Given these premises, I fear that Italy is strongly exposed to a serious debt crisis, precisely because it has increased the component of debt (BTPs) placed on foreign and institutional subjects. This crisis may become apparent in all its severity as soon as the ECB decides to change course or even just to ease up on its government bond repurchase programmes.
If this happens, we have to expect a new crisis of liquidity and credibility of the country, which the rating agencies as well as the EU bodies will propose to solve in the usual way, i.e. with the acceleration of privatisation processes, with austerity plans, de-industrialisation and further transfer of strategic economic policy levers to supranational bodies.
What are the investment choices an entrepreneur could make in order to achieve benefits at this time?
In the Covid scenario, the sectors that stand to benefit the most are undoubtedly the chemical-pharmaceutical industries, hygiene products, but also smart-working technologies as well as raw materials and precious metals, which will benefit from the weakening of the dollar following the massive injections of liquidity that the major investment banks will provide in the coming years.
In particular, all precious assets that can act as a 'store of value' are at an advantage compared to holding money itself. In fact, in the scenario of continuous and massive injections of liquidity by central banks, currencies will lose value compared to real goods, namely commodities, crypto-currencies, real estate, but also art, luxury cars and all other objectively scarce economic goods.
What are the strategies of Hetica Capital strategies within this framework?
Hetica has chosen to focus increasingly on its critical success factors, which are the creation of unprecedented investment opportunities, capable of generating returns that are almost totally unrelated to economic trends in general and financial markets in particular.
Initiatives that rightly fit into this scenario include income-producing real estate projects, a fund that invests in blockchain-related projects, a market-neutral fund focused on gold and, most recently, a classic car fund.
By Lawyer Giuseppe Lepore, Editor-in-Chief AS Finanza.
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