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Executives concerned about rising sovereign debt

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Rising sovereign debt in the developed world is one of the main concerns for the world’s business leaders and financial executives, according to 440 senior executives who participated in a survey commissioned by RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada.

The survey, conducted by the Economist Intelligence Unit, found that the debt problems facing eurozone nations have raised questions about the monetary union’s future in its current form.

Almost half of those surveyed agree that there is a greater than 50 per cent chance of one or more countries leaving the eurozone in the next three years. More than one-third (36 per cent) see at least a 25 per cent chance of a complete breakup of the eurozone over the same period.

Out of those who see a significant chance of the eurozone losing a member in the next three years, Greece is considered the country most likely to leave the eurozone, followed by Portugal, Spain and Ireland. Germany is perceived as the fifth-most likely country to leave the eurozone, 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 per cent or more, indicating a rising concern that the debt problems facing the global economy may spill outside the eurozone.

Among those who foresee a significant chance of a G20 default, Italy received the most votes, followed by Argentina, Turkey, Mexico and Russia. The UK is perceived to be the Western European country, after Italy, most likely to default on its debt, both within the G8 and the G20.

Two-thirds of executives (67 per cent) 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. Eighty per cent of the respondents believe the dollar will remain the dominant reserve currency in three years’ time, with the consensus dropping to 57 per cent over a five-year period.

This picture likely says more about the lack of real alternatives, rather than confidence in the dollar, and is further illustrated by the fact that more respondents (15 per cent) see the Chinese renminbi as the reserve currency of choice within five years rather than the euro (12 per cent), despite the low likelihood of this occurring.

Although the dollar is expected to remain the world’s reserve currency for the near future, 40 per cent of respondents believe that 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. The recent action by the Chinese government which led to the removal of renminbi’s unofficial peg to the dollar further strengthens this expectation.

Survey respondents see an increased divergence between emerging and developed economies. Eighty-seven per cent of the respondents 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.

Demand for funding is low today, with just 38 per cent of corporate respondents expecting 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. Investment-grade borrowers, both corporate and sovereign, can choose their investors and almost name their price. Nevertheless, 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 corporates looking to finance – at the very least – day-to-day needs, this competition presents a highly challenging overall environment for raising capital.

Marc Harris, co-head, global research, RBC Capital Markets, says: "Competition for capital will no doubt become more acute for corporates and sovereigns and the next few years will continue to present a challenging environment. While there is an obvious consensus that not all sovereign bonds are created equal, our survey results imply that investor appetite for specific sovereign debt will be closely correlated with each country’s ability to bring fiscal discipline in fighting the spectre of inflation."

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