Investor confidence low

Fitch Ratings
Euro crisis will continue in 2012

The eurozone sovereign debt crisis will continue largely unchanged in 2012, according to a survey of investors conducted by Fitch Ratings.

According to the survey 25% think the crisis will get worse, while 24% think it will get better this year. Meanwhile, 48% say the crisis is likely to continue throughout the year.

The report showed a shift in mood with survey respondents seemingly more positive about credit issues across all major fixed-income categories. This is in contrast to Q3 in 2011 when investors expressed negative expectations across the board, relative to the previous quarter.

There was a noticeable change in bank confidence amongst investors with 22% marking the banks’ challenges as their greatest concern. This was down from 49% in Q4 last year when it was ranked above sovereigns for the first time. The change can be attributed to the European Central Bank’s (ECB) three-year maturity longer-term refinancing operation (LTRO) action in December, with a second to follow later this month.

Despite concerns surrounding the eurozone crisis, a record 27% of respondents stated banks as their first investment choice, only beaten by industrial corporates, with 28%.

However, investors also expressed a caveat regarding the banking sector based on the link between the eurozone banking system and its political unity. Half of all respondents said that only a resolution of the eurozone crisis will make banks a good investment again. High profile initiatives – such as increased capital, clarity on resolution legislation and imposing limits on assets for debt collateralisation – are not in themselves enough to restore banks’ credit standing.

A further 36% said a eurozone crisis resolution and the other specific measures would all be necessary.

Only 10% of investors surveyed believed that increased capital would restore banks’ credit status and attractiveness to fixed-income investors. Even fewer – just 3% – said clarity on resolution legislation, including bail-ins and depositor preference, would suffice.

While the ECB’s LTROs boosted banks, benefits to sovereigns are viewed as uncertain, 37% of respondents said the ECB liquidity action in December was “the big bazooka”, reducing the risk of eurozone sovereigns facing liquidity crises. However, 54% said there would only be limited take-up by banks for the purpose of buying sovereign debt.

Meanwhile, investors remain troubled by the fragile economic outlook, rating the risk of a double-dip recession high and inflation risk at the lowest since the end of 2010. This cautious stance is also evident in views on corporate growth investment, which have continued their downward trend since mid-2011.

Full report is available at Fitch Ratings

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