Pimco’s Balls: how I would advise Mario Draghi

ZURICH: Mario Draghi should pull the trigger on quantitative easing and make Italy and Spain his prime targets, regardless of German sentiment, according to Pimco’s Andrew Balls.

The Euro Stars AA-rated bond manager made the comments as part of a roundtable event at the Fonds ’12 Conference in Zurich earlier this week.

In response to question on how he would advise European Central Bank president Mario Draghi, Balls said he would welcome more assertive action from the Italian, which would see the ECB's longer term repurchasing operation expanded alongside the introduction of full scale quantitative easing.

He said: ‘I would advise him to use the macro situation as justification for quantitative easing which would then focus on Italian and Spanish bonds. They are the bonds the ECB would buy, as they offer more bang for your buck.’

‘I would love to see him go all in and adopt a style like Ben Bernanke or Mervyn King, or even resign and appoint an Argentine to do it.’

Balls said Draghi should then purchase Italian and Spanish debt, which, falling short of solving the eurozone crisis, would create a strong ‘fire break’ to stop further contagion.

‘This is not going to help the likes of Portugal but, in terms of size, the Spanish and the Italians are the important ones,’ he said.

German hurdle

In terms of bringing such theory into practice, Balls said the major hurdle for Draghi is political wrangling with Germany.

‘If I was advising Mr Draghi I would ask what is the one constraint on the expansion of your balance sheet?’ he said.

‘And, to a large extent, that is Germany – the will of the German government, and the role of the German markets and the people. Your constraint is Germany and whether the German people will put up with an expansion of the balance sheet.’

Earlier in the day, as part of a presentation on policy in Europe, Balls had praised Draghi as one of ‘two competent men in the eurozone, where perhaps before there were none’ - the other man in question being Italian Prime Minister Mario Monti.

Balls currently runs seven funds on behalf of Pimco. His top performing fund over the past three years is the PIMCO GIS Euro Bond fund, which has returned 22.77%, while its benchmark, the Citigroup EuroBIG TR rose by 12.56% over the same period.