European fixed-income investors expect the troubled eurozone to resist pressures and stay intact, according to Fitch Ratings’ quarterly investor survey.
Only a small minority (5%) of survey respondents said they believe the eurozone end-game will be a wide-scale break-up. A further 9% think there will be multiple sovereign debt defaults within the zone but do not expect these events to cause a break-up. In addition, 21% of respondents expect Greece and possibly one or two more countries to exit the union. However, the majority expect a move towards fiscal union (33%) or a ‘muddling through’ (31%).
These responses are similar to those given in Fitch’s October 2011 survey. Notably, a similarly small proportion (4%) of respondents to that survey expected a eurozone break-up. This indicates that despite the volatility over the last 10 months, investors are taking a long-term view and showing faith in the European project.
Fitch believes a full break-up and demise of the euro is highly unlikely, because of the huge costs and the strong political commitment to Economic and Monetary Union (EMU). Nevertheless, the severity of the sovereign crisis has shown that fundamental reforms, centred on deeper fiscal, financial and political union, are required to make EMU viable. Some of these reforms are gradually being put in place, for example in the fiscal compact.
Fitch’s base case is premised on policymakers introducing additional measures. These are likely to include some dilution of national fiscal sovereignty, potentially some partial mutualisation of sovereign liabilities and resources, enhancement of pan-eurozone financial supervision and intervention, and further institutional reforms to strengthen eurozone economic governance.
The Q312 survey was conducted between 2 July and 2 August and represents the views of managers of an estimated US$7.2 trillion of fixed-income assets.
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