North Asset's Papamarkakis Sees Europe's Debt Crisis Resurfacing

Europe's sovereign-debt crisis will resurface in markets even after the European Central Bank pumped money into the banking system and Greece restructured its debt, according to George Papamarkakis at North Asset Management LLP. "We still have big issues," Papamarkakis, chief investment officer and co-founder of North Asset, said at a Bloomberg Link conference in Frankfurt. "Portugal needs to tap the credit markets next year and clearly that is not possible. Everyone is looking at Spain and France is the big elephant in the room." Spanish bonds fell for a ninth day today and the euro dropped against the yen and the dollar. A measure of manufacturing in the euro area contracted in March more than forecast, adding to concern that the major European economies of Germany and France are slowing. "The ultimate result is really very difficult to predict, but we will have some kind of common issuance or some countries will go out" of the 17-nation euro area, London-based Papamarkakis said. "But we will see a lot of volatility." The manager said that his company holds instruments that climb with rising volatility in fixed-income and interest-rate markets. He owns some sovereign bonds in the region, while he has shorted debt from other nations he didn't identify. Short sellers profit from taking bets that securities will drop in value.

Bet on Volatility

Investors should bet on an increase in volatility, said David Hauner, head of eastern Europe, Middle East and Africa fixed-income strategy and economics at Bank of America Corp.'s Merrill Lynch unit.
"The one thing you should be doing right now is buying volatility, because it is ridiculously low," Hauner said at the same conference. "It is hard to see what will we be the next source of disruption. But it is very clear that there will be a significant spike in volatility." Greece pushed through the biggest sovereign-debt
restructuring in history this month after getting private investors to forgive more than 100 billion euros ($132 billion) of debt. The Mediterranean nation needed the deal to obtain a second bailout from the other 16 euro-area countries. Politicians think that a country can default without disrupting the markets, Papamarkakis said.
"Greece means the private sector and the banking sector is in a worse situation, and that is what will happen with Portugal. We are actually increasing the risks" with bailouts for states and banks, "and I don't know if politicians appreciate the Pandora's Box they've opened with this Greece default."

Alexis Xydias and Abigail Moses (Bloomberg)