Fitch Ratings said that its latest European fixed-income investor survey clearly captures rising worries about the eurozone. The results of the quarterly survey, which was conducted in April, are published today.
"Respondents signaled intensified concern over developed market sovereign issuers, with the proportion expecting significant credit deterioration nearly doubling from the previous quarter to 19%," says Monica Insoll, managing director in Fitch's credit market research group. "Expectations for financial institution credit strength also deteriorated, partly driven by concerns relating to the impact of new regulation."
Respondents believe that the bedrock asset class of eurozone sovereigns would have by far the biggest difficulty refinancing borrowings, against a backdrop of widening budget deficits and rising debt. Survey participants also signaled that governments will face higher funding costs amid rising concern over future defaults and losses.
The pessimism on sovereign borrowers contrasts sharply with the broadly more enthusiastic outlook for most other asset classes, such as investment and speculative grade corporates as well as emerging market issuers. Credit profiles are anticipated to strengthen further and confidence is rising that losses are largely a matter of the past. However, in a sign of the contagion risk of sovereign concerns, survey participants indicated that they expect the 14-month long credit rally to continue to falter.
Meanwhile, the corporate sector is expected to continue to hoard cash and repay debt. Capex is viewed as a low priority. There is an increased belief that companies will engage in merger and acquisition activity, although investors expect deals to be financed by a mix of debt and equity, protecting credit profiles.
Most investors expect issuance to rise across the board, with the exception of investment-grade corporates, emerging market sovereigns and structured finance.
Fitch noted that in the year to date, European debt capital market activity has been lagging 2009 by 25%, with issuance totaling $1,732 billion, according to Dealogic.