Global execs fret over sovereign debt: RBC study

June 29, 2010

TORONTO: Business leaders and financial executives from around the world
are concerned with rising sovereign debt in developed countries, according to a survey by RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada.

The following are key findings from the 440 senior executives (North America, 34%, Europe, 41%, Asia Pacific, 16% and the rest of the world, 9%) who participated in a survey:

Sovereign default

• Almost half agree there’s a greater than 50% chance of one or more countries leaving the eurozone in the next three years. More than one-third (36%) cite at least a 25% chance of a complete break-up of the eurozone over the same period.

• Greece is considered the country most likely to leave the euro zone, followed by Portugal, Spain and Ireland. Germany is in the fifth position, possibly reflecting the respondents’ concern that the German government may lose confidence in the monetary union if the current crisis continues.

• While the prospects of a G20 economy defaulting on its debt remain relatively low, almost one-third of the respondents place the odds of this occurring at 50% or more, indicating a rising concern that the debt problems facing the global economy may spill outside the euro zone.

• Italy received the most votes for most likely to default, followed by Argentina, Turkey, Mexico and Russia.

Outlook for currencies

• 67% believe the value of the euro will continue to slide over the next 12 months. Concerns about the euro’s weakness have reinforced the position of the dollar as the reserve currency of the near future, although its power is perceived to be in decline.

• 80% of the respondents believe the dollar will remain the dominant reserve currency in three years’ time, with the consensus dropping to 57% over a five-year period. RBC says this likely reflects the lack of real alternatives rather than confidence in the dollar, with 15% seeing the Chinese renminbi as the reserve currency of choice within five years rather than the euro (12%).

• 40% believe over the next three years the currencies of exporting countries, such as the Persian Gulf States, Taiwan and Hong Kong, will stop being pegged or managed closely against the dollar. China’s removal of the renminbi’s unofficial peg to the dollar further strengthens this expectation.

Emerging and developed economies

• 87% expect growth in the developed nations to be positive, albeit modest and remaining below historic norms. Respondents have a positive outlook for industrialized Asia, followed by North America, while there is a strong consensus that Europe’s prospects are negative.

• 66% predict an increasing growth imbalance between Europe and the rest of the world, even as US economic influence is seen to be waning.

• 56% see emerging markets such as China, Brazil and India replacing the US as a source of demand driving global growth.

• 59% believe that the governments of developed countries will not have the firepower to raise the credit needed to jump-start their economies in the event of another financial crisis. A similar number agree that the credit capacity of developed economies will diminish compared with today (58 per cent).

• 64% agreed that developed countries will not stop increasing their levels of indebtedness until investors force them to do so by scaling back on debt purchases.

• 39% say that corporate bonds from the most creditworthy companies will come to yield less than their sovereign benchmarks. In spite of these concerns, just 41% have adjusted their portfolio strategies.

Competition for capital

• 38% of corporate respondents expect to raise fresh capital in the next two years. However, the competition for capital may well grow more acute as heavily indebted governments seek to raise unprecedented amounts of capital for structural outlays related to aging populations, deteriorating infrastructure and possible energy and climate crises.

• This new level of scrutiny will bring about a new era of competition for capital. Over the next few years there will be stiff competition for increasingly scarce capital. With banks looking to rebuild balance sheets in a more stringent regulatory environment, sovereigns seeking to restore public finances to health, and corporations looking to finance even day-to-day needs presents a highly challenging environment for raising capital.

Click here for a copy of the survey findings.