Protection of central banks against default is limited, says Pimco

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(Bloomberg) – Pacific Investment Management warns credit investors: central banks cannot do much to protect them from losses if the wave of corporate loans driven by the pandemic triggers default.

Companies accumulate debt when they also face the pressure of transitioning to digital and green business models, as well as the impact of the pandemic, said Joachim Fels, Pimco’s global economic consultant, in response to questions from Bloomberg News after presenting the secular October scenario of asset manager.

Investors need to keep in mind that central banks are subject to limits in terms of what they can do to protect against the potential increase in defaults, he said.

“With corporate debt much bigger now and the transition from physical to digital and from ‘brown’ to green creating many losers, we may be on the way to a default cycle,” said Fels, who advises Pimco, with $ 1.92 trillion in assets under management. “Central banks cannot protect investors from defaults” and from impairment of assets.

The US Federal Reserve and the European Central Bank injected an unprecedented scale of stimulus into the economy by buying a combined total of $ 76.4 billion in bonds since March to support the credit market during the coronavirus turmoil.

This effectively created a two-tier universe for corporate debt with a class eligible for central bank assistance and an ineligible category more exposed to potential shocks.

Fels said he believed central banks would “most likely increase” asset purchases if the pandemic further affected the economic recovery process. This would create a barrier for investment-grade credit holders, which has been the focus of the corporate quantitative easing programs announced earlier this year.

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