Aegon Asset Management bond fund manager Phil Milburn has slammed calls for holders of weaker EU government bonds to accept losses to stabilise the nations.
He says some commentators are calling for bondholders to take a so-called haircut on the value of bonds issued in nations such as Greece, Ireland, Portugal and Spain. But Milburn says: “These professors say bondholders need to take a haircut. They are complete and utter idiots, that is not how it works. There is a price to everything. The bondholders would just price it out.”
He says the effect of a haircut on Ireland’s ability to maintain financial stability would be catastrophic. He says: “Punishing bondholders makes things worse, not better. Ireland still has to be able to access the market.”
He adds that a haircut would aim to punish institutional bondholders but ultimately they are running pensions and savings for individual investors, who would suffer the losses.
In September, German chancellor Angela Merkel tried to persuade other European leaders that bondholders will have to accept part of the risk in future bailouts.
She is thought to be planning to bring new clauses into EMU government bonds, paving the way for haircuts to become an option in times of financial crisis as early as 2013.
Milburn says he is avoiding the “peripheral” EU nations in his £291m high-yield bond fund and the £374m strategic bond fund he co-manages with David Roberts as a result of the situation.
He says: “We are continuing to just avoid the peripheral risk until it comes to a head. There is no use trying to be a hero there.”