Risk Expert Warns of Melt-Downs to Come.

Thursday, March 15, 2012

MELBOURNE, March 15 Asia Pulse - The European debt contagion has started to reach Australia and capital preservation and income will be critical for investors wanting to survive the wild swings to come on global markets, says risk expert, commentator and author Satyajit Das. 

Greece was just the first cart of a doomed train and that Europe's debt crisis was much worse than most people acknowledge, Mr Das said. 

Europe is China's biggest trading partner and therefore the first line of contagion from the meltdown from Greece's default, he told AAP in an interview. 

"That's going to have some effect on the commodity prices here - it's inevitable. 

"If you look at the profitability for the last quarter in the mining sector you are starting to see signs of it." 

Earnings downgrades among miners were a feature of the corporate reporting season in February. 

Around 20 per cent of Australia's $A1 trillion (US$1.05 trillion) in superannuation funds is invested offshore and this would be hit by losses from Europe. 

Local investors need to have capital preservation and income as high priorities, including term deposits, bonds or high dividend-paying stocks, Mr Das said. 

"Then the question is how do you capture the melt-ups and the melt-downs because we're going to get a lot of them. 

"Professional investors will buy out of the money options and try and capture the big (market) movements." 

The concept of buying and holding investments was nonsense, and investment diversification was another myth that could be applied only when the world was normal - before 2007 (and the Global Financial Crisis), he said. 

Mr Das said the International Swaps and Derivatives Association (ISDA), the unofficial lobby group for a host of banks, including the big four Australian lenders, decided credit default swaps (CDS), a type of insurance, would be paid to holders of Greece bonds so they could curb their losses. 

However, Greece's issues are far from being settled, he said. 

"The real problem is you don't know who's bought and who's sold (the bonds). 

"Seventy per cent of Greek CDS are protected by collateral but we don't know what collateral it was or how good it was." 

Legal challenges to the default and restructuring were likely, Mr Das predicted. 

More worrying was the possibility of the debt contagion spreading beyond Portugal, Ireland, Spain and Italy and into Europe's core of Germany and France. 

Europe is "a body with cancer" and if its politicians make all the right decisions it has only a 25 per cent chance of muddling through with slow growth. 

"Basically they get stuck in the modern version of a Depression," Mr Das said. 

Despite the US Federal Reserve's more upbeat assessment of the US economy overnight, Mr Das says US economic growth will chug along at between zero and two per cent because of the absence of real (inflation-adjusted) wage growth. 

Low inflationary pressures mean more quantitative easing in the US was likely, but investors should beware the of certainty that credit markets would freeze again, he said. 

Mr Das spent over 30 years in financial services and was a banker with Citicorp Investment Bank and Merrill Lynch. 

AAP ry 15-03 0919