Capital has begun flowing out of the countries sharing the euro signaling “another storm” may be about to break, according to Thomas Kressin of Pacific Investment Management Co., which manages the world’s biggest bond fund.
The euro lost 5 percent of its value since the beginning of May, on a trade-weighted basis, and about 8 percent against the dollar, according to Kressin, head of European foreign exchange at Pimco in Munich. That contrasts with earlier crisis periods when the euro held steady as capital flowed from peripheral nations into the core, Kressin said in a posting on the company’s Web site.
Investors are losing confidence in the single currency and seeking havens for their cash outside the euro area as Europe’s debt crisis drags on in its third year. That has forced the Swiss National Bank to buy euros to prevent the franc appreciating, and prompted the Danish central bank to charge for the use of its deposit facility while yields on U.K. two-year notes are less than 0.14 percent.
“Now there are growing signs that the crisis of confidence in the euro zone has assumed a new dimension,” Kressin wrote. “Whereas initially investors fled to the safety of the euro zone’s core, now they are taking their capital out of the eurozone altogether.”
The Swiss central bank’s sales of the euro to rebalance its reserves are “reinforcing” pressure on the single currency, according to Kressin. Its purchases of top-rated European government bonds, particularly bunds, are also forcing down yields on those securities, he said.
“When the storm clouds gathered over ‘little’ Greece at the end of 2009, it seemed unthinkable that the debt crisis and the flight of capital would shake European monetary union — once proclaimed as ‘irreversible’ — to its very foundations,” he wrote. “Now, though, another storm could be about to break.”
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