According to the latest survey by Fitch Ratings, the upcoming regulations are seen by the majority of investors as the greatest threat to the credit market over the next 12 months. The fear is that bank creditors will be forced to share the cost of bank failures. 60% of recipients believe the peak of loss‐taking is still to come in the developed sovereign debt market.
“Survey participants signaled that governments will face higher funding costs amid a rising concern over future defaults and losses.”
The latest “European Senior Fixed Income Investor Survey” from Fitch Ratings is one of the most interesting in a long time. A major shift in investors sentiment have taken place in the first quarter of 2010. Only 6 in 100 would choose government debt if they were to invest today. The proportion of investors expecting “significant” credit deterioration have nearly doubled – to 19% – since the last survey.
“Potential changes to resolution regimes may provide that certain bank creditors have to share the costs of bank failure. Such changes could have potentially serious implications for bank investors right across the capital and funding structure,” according to the majority of investors participating in the survey.
In fact, they would rather use their money to buy speculative risky junk bonds than invest in government debt.
However, the reason is obvious; cash doesn’t yield much these days.
I guess it’s further evidence that the thing politicians call “greed” and bankers call “risk appetite”, is very hard to kill.
But one small remark by Fitch may give reason for concern:
“Overall, the survey results showed that, while remaining at high levels, investors are signaling a slightly reduced focus on conservative financial priorities such as maintaining cash cushions and prioritizing amortization of debt.”
“However, in terms of the outlook for capex, investors remained cautious in the face of weak demand growth and persistent production overcapacity,” the rating agency adds.
States Financial Costs To Increase 25% ?
Since the last survey, at end‐April, major volatility have hit the markets, triggered by concerns over the region’s ability to contain the Greek problem, highlighted by a desperate EUR 750bn rescue package to support the euro.
“Intensifying investor concerns regarding developed‐market sovereigns are expressed throughout the survey results. Respondents believed this bedrock asset class would have by far the biggest difficulty refinancing debt, against a backdrop of an expected weakening in credit fundamentals due to rising budget deficits and debt. Survey participants signaled that governments will face higher funding costs amid a rising concern over future defaults and losses,” Fitch points out.
“Investors signaled intensified concern over developed‐market sovereign issuers, with the proportion expecting significant credit deterioration nearly doubling to 19%. More broadly, the total share of respondents anticipating deterioration (74%) remained in the 70%‐80% range which has prevailed since early 2009,” the survey shows.
Still, an alarming 13% of investors believe that the cost of insuring government debt will increase by more than 25% in the next 12 months.
57% expects an increase by up to 25%.
“The reading for sovereign issuer spread expectations again points to the higher cost that investors expect indebted euro zone governments to pay. In addition, the data signals a general shift of the debt capital markets towards a more cautious mood, with spreads also anticipated to trend up for all other asset classes.”
Forced To Pay For Bank Failures?
Even if the sovereign debt problem is seem as the greatest threat to the overall economy, the new financial regulations are seen as the greatest threat to the credit market; the banks and other credit institutions.
Investors fear they may be forced to pay for bank failures in financial firms they’ve invested in, or lent money to, the report says.
The Q2 survey features 70 responses from the top 100 investing institutions in Europe, obtained during April 2010, Fitch disclose.
The survey reveals several more interesting facts about what’s going on in the heads of investors these days.
For example, 47% thinks the risk of a so-called “double-dip” in the economy is high, while 53% thinks it’s low.
54% sees the risk of withdraw of fiscal stimulus as a high risk in the coming 12 months, and nine out of ten investors says there are a high risk of more souvenir debt problems in the near future.
According to the survey one of three investors buy co-called “Credit-default Swaps”, but very few use these instruments as debt insurance, as originally intended.
When it comes to inflation or deflation, there are just as many who thinks we’ll see high inflation in the months to come, as who thinks we’ll see severe deflation.
There are just as many who believe in low inflation, as in high inflation.
I’m not sure what to make of this, but either the balance between optimism and pessimism is perfect.
Or no one’s got a clue
I’m afraid the last alternative is the truth.
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