Argonaut Capital: Crisis Has Exposed Flaws in Architecture of Eurozone

Argonaut Capital: Crisis Has Exposed Flaws in Architecture of Eurozone

Argonaut Capital is a New York-based hedge fund manager, with $6 billion asset under management. The fund was down 2.84 percent in June, mainly due to its short positions in Europe. This follows a 2% decline in May, as we reported in June.

The fund is currently up in July according to our sources with direct knowledge of the matter.

David Gerstenhaber, the CEO of the hedge fund, has become increasingly bearish over Europe’s problems. Gerstenhaber is still bearish on Europe as explained below.

The fund says the situation across Europe is pathetic. More than a decade of poor fund allocation has left Eurozone with too much of outstanding debt, and poor growth rate potential. In its June 2012 letter to investors, Argonaut Capital states that the basic structure of Eurozone is severely flawed. It doesn’t have proper fiscal backstop mechanisms, the labor markets and pension regulations are balkanized, and the offenders who breach rules and regulations are easily sanctioned.

European Union economy is shrinking, and financial dynamics are exacerbating rapidly. The report says that austerity measures, which were adopted by some countries to control the widening budget deficits, will continue to affect the GDP growth.

Argonaut Capital clarifies that the balance of payments, banking, and fiscal policies are the three main sources of crisis. It also recommends certain solutions to overcome the sovereign debt crisis, such as monetization of debt, structural reforms to improve competitiveness, breaking the bridge between sovereigns and banks, and massive infusion of outside capital. The financial architecture of the region can also be improved by establishing a single regulator, and Eurozone-wide deposit insurance.

Despite several summits and meetings, the European policymakers haven’t found a common ground on nature, cause, and solution of the crisis. Eurozone crisis is adversely affecting countries around the world. Sliding imports in Europe have hampered the manufacturing in China and other Asian countries.

However, Argonaut Capital is still hopeful that eventually Eurozone will recover from the crisis. It cites two reasons to back up its belief:

1. The chairman of European Central Bank, Mario Draghi, continues to reaffirm that ECB will take bold steps to keep the financial markets intact and to avoid any future shocks.

2. Countries in the region are politically committed to maintaining the monetary union. The most powerful governments in EU (Germany and France) believe that monetary union is crucial to their 60-year old efforts of political integration.

The shaky political situation, poor employment reports, and slow economic growth in the US is also a cause of concern. The only sectors showing some strength are housing and automobiles. The housing market has been strong over the past  year, especially the multifamily sector. Auto sales have picked up, due to decent household income growth and easy credit.

The hedge fund notes that the growth rate of China has declined, but there is no sign of a hard landing. Argonaut states that the years of resource intensive infrastructure and industrial development are over now, and would never come back. However, Chinese government may ramp up the fiscal and monetary stimulus measures, but that won’t have stupendous effect, like the previous one in 2008.

Argonaut Capital suggests that policy easing is the only available way to weather the economic slowdown. Every milestone of acceleration in economic growth since 2009 has been a direct result of policy intervention.