One of the biggest Nordic fund managers says he's worried that credit might stop flowing around the globe if governments don't act more forcefully.
Reima Rytsola, chief investment officer at the Varma Mutual Pension Insurance Co. in Helsinki, said he can see clear signs that financial conditions have tightened despite efforts by central bankers to provide emergency liquidity.
If the world sinks into a credit crunch, it "would draw out the recession significantly," Mr. Rytsola said March 14 in an interview. He's now waiting for indications, especially in the eurozone, that governments are ready to add substantial fiscal stimulus, given that "the ECB is out of ammunition."
Germany, the biggest economy in the eurozone, said March 13 it may drop its long-standing balanced-budget policy to help pay for measures to stem the fallout of the coronavirus. The U.S. has passed a bipartisan economic relief plan.
Mr. Rytsola said the U.S. package "creates faith that they're able to operate also on the fiscal side," but he fears that the measures announced so far "are not yet enough, until we find out the magnitude and duration of the coming shutdown."
In Europe, Mr. Rytsola said the main concern is the lack of fiscal coordination across the region, which he worries will hamper efforts to deliver effective measures despite action by individual governments. And while the latest signals from Germany are encouraging, it's not yet obvious they'll be adequate, he said.
Europe has become the new epicenter of the pandemic, with governments imposing travel bans and closing borders as millions stay home to avoid contagion.
For investors, buying hedges against so-called tail risks might look like the "obvious answer," Mr. Rytsola said. But anyone adopting that strategy would already have lost money, he said.
"If you had hedged against such a market reaction through this historical bull run," Mr. Rytsola said, "you wouldn't still be in the money with that strategy."