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By Jeremy Glaser | 08-24-2011 02:36 PM

Asian Economy Crucial to Europe

A slowdown in Asia could cause an even further drag on core Europe, especially export-dependent Germany, warns BlackRock's James Bristow.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Global markets continue to be focused on the European sovereign debt crisis and the potential for slow growth in Europe for years to come. I'm here today with James Bristow. He's the managing director and co-portfolio manager at BlackRock International fund, and we'll talk a little bit more about this.

James, thank you so much for taking the time today.

James Bristow: It's a pleasure.

Glaser: We've heard about a lot of plans coming from a bunch of different members in the European community, from politicians to the European Central Bank. What do you think really needs to happen to solve the European debt crisis?

Bristow: Well, Jeremy, I think that's certainly a big question. I think I'd differentiate between what's needed to stabilize and support risk assets in the short term, from actually what needed to happen in the medium term to reduce the very high levels of sovereign debt in Europe.

In the near term, I think markets are nervous because they continue to see really no clear or comprehensive path mapped out by politicians in Europe. It's Europe really that in our view is most critical here. And as a basis for market stabilizing, I think we need to see at least three things.

So firstly, I think we need to see a commitment to increase, if necessary, the size of the EFSF bailout fund and that's beyond the EUR 440 billion level that should be agreed in September. Second, I think we need a lot more clarity on both the extent of open-market bond purchases by the ECB--and this is in relation to Spanish and Italian bonds--but also the duration of those bond purchases because they're really the key to keeping Spanish and Italian yields low.

Then in the medium term this environment above will really provide the backstop we think for Europe's most indebted countries really to start a longer-term debt workout that they need to do. This really requires a few additional things. It needs a combination of further austerity in countries that are not yet running a primary surplus. I think it also needs further capital raising by the banking sector in Europe, generally to give it more of a buffer in what we think is likely to remain a low-growth environment.

And then alongside this and I think this was the message that German chancellor Angela Merkel and French president Nicolas Sarkozy gave a week or so ago, Europe really has to start to build the institutions required to support euro bond at some stage in the future. So I think there are a lot of things that are needed to be done in both the short term and the medium term.

Glaser: You just mentioned a lot of different things that need to happen for the crisis to get solved, but is there any really any political will among both voters and politicians to actually implement this and to make it happen, or are they going to keep kicking the can down the road?

Bristow: Well, I think the slow-growth environment probably persists in Europe for some time given the extent of the debt workout and how long it takes economies to get out of that. I think the time for kicking the can down the road is really coming to a close now for Europe's leaders. I think they see the risks now in terms of sovereign crises spreading beyond the smaller peripheral countries to bigger countries. I think they see those risks really very close to them now, and really the time for talking and providing solutions that don't show investors a clear path to solving this, I think that time is over.

So, we'd expect really much more action from Europe, much more coordinated action from Europe in the next six months, really mainly because they have to do it, otherwise the bond markets will really force a worse outcome if Italian and Spanish yields particularly continue to blow out.

Glaser: You mentioned that banks could be at risk. What's your view of the financials sector in Europe, and do you think that those institutions are appropriately capitalized right now?

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