European fixed-income investors are unconvinced by recent policy efforts to solve the eurozone crisis, indicating that additional measures are needed, according to Fitch Ratings’ quarterly investor survey of asset managers’ outlook for the credit markets. The majority (58%) of investors think the eurozone fiscal compact is positive but marginal in solving the crisis, while only 25% regard it as an important policy innovation bringing crisis resolution closer; 17% view it as an irrelevance.
In Fitch’s view, the fiscal compact is an important step towards building confidence in fiscal discipline in the eurozone, but additional measures are indeed needed.
These are likely to include some dilution of national fiscal sovereignty; potentially some partial mutualisation of sovereign liabilities and resources; as well as measures to enhance pan-eurozone financial supervision and intervention, combined with further institutional reforms to strengthen eurozone economic governance.
Respondents also expressed a more negative view on fundamental credit conditions for the sector – with 71% believing these will deteriorate, up from 58% in the Q112 survey. This is in line with Fitch’s negative outlook on most eurozone sovereigns. Investors were also concerned about refinancing prospects, with 79% voting it the most challenged sector – an all-time-high. This dissatisfaction resulted in 49% of investors electing developed sovereigns as their least favoured investment choice. This is up from 31% in the last quarter, and is a new high, beating the 46% recorded in Q210 during the midst of the Greek crisis.
Fitch expects the eurozone to ‘muddle through’ the crisis as economic adjustment proceeds, combined with gradual (if halting) steps towards closer fiscal and economic integration. However, other outcomes cannot be ruled out, particularly until economic recovery is underway and unless there is greater progress in reforming the eurozone.
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