NEW YORK, LONDON, TORONTO, Jan. 31 /CNW/ - More than four-in-ten
executives (46 percent) from around the world said their own country's
external debt was growing at an unsustainable level, according to a
survey of 461 finance and global business leaders. Over 60 percent of
U.S. and UK respondents believe that to be true about their
government's debt. In Europe, respondents from the UK and the periphery
of the eurozone, such as Portugal, Ireland, Italy, Greece and Spain,
are among the most pessimistic about their nation's external debt.
Conversely, Canadian respondents were among the most optimistic.
The third semi-annual RBC Capital Markets Global Survey was commissioned
by RBC Capital Markets, the corporate and investment banking arm of the
Royal Bank of Canada, and conducted by the Economist Intelligence Unit.
The survey measures the sentiment of global executives at a crucial
time when global imbalances between the developed and developing world
are producing diverging outcomes in economic prospects and fiscal and
Against this backdrop, nearly half of executives polled (49 percent)
said that their government would reduce its debt level mainly through
spending cuts, while three-in-ten executives (30 percent) believed that
their government would rely primarily on tax increases. An additional
13 percent of respondents thought inflationary policies are the primary
way their government will reduce debt.
"The debt that hangs over individual countries is casting a long shadow
in the minds of corporate executives and investors," said Marc Harris,
co-head, Global Research, RBC Capital Markets. "The results of the RBC
study are a clear call to action by the world's business leaders."
The survey included findings on:
Other government action
Government Debt: With large amounts of debt needing to be refinanced in the next 12
months, 12 percent of executives polled predicted their government will
experience a funding shortfall over the next one to three budget cycles
and will not be able to fund that shortfall. More than one-third (36
percent) said their government will be able to fund the shortfall, but
it will be difficult, and a similar number (34 percent) expected their
government will easily be able to fund the shortfall.
An overwhelming majority of the executives surveyed (85 percent) said
there was a chance that one or more eurozone countries would leave the
monetary union over the next three years. Just 15 percent said there
was zero chance of that happening. Though the majority of those polled
(60 percent) said there is a chance that the eurozone would break-up
over the next three years, 40 percent believed there is a zero chance
of this happening.
"Fiscal austerity measures are a concern for global executives anxious
that a persistent downward spiral of higher levels of debt will lead to
slower growth, a further withdrawal of assets and more losses on bank
balance sheets, said Richard E. Talbot, co-head, Global Research, RBC
Capital Markets. "Even in countries that are less severely affected by
sovereign debt problems, almost all respondents believe that
governments will have some problems financing themselves, particularly
when the scale of debt that is maturing over the next year is taken
Inflation Risk: Asked about the most likely scenario in their domestic market over the
next three years, 84 percent of respondents expected inflation to increase in their country,
compared with 58 percent in the RBC Capital Markets Global Survey
completed in May 2010; only 14 percent of respondents expected a trend
towards either stable prices (no inflation) or deflation. While
respondents agree on the increased risk posed by inflation, respondents
were split on the causes of inflation, with 39 percent attributing it
to excessive monetary stimulus, 34 percent to higher import prices
(including commodities) and 20 percent to excessive fiscal stimulus.
Trade Policies: Three-in-ten of the financial executives polled (30 percent) said the
main constraint on exports from their country was lack of external
demand. An additional 20 percent cited overvaluation of domestic
currencies while 11 percent pointed to trade barriers, including
tariffs and regulations. Other responses included: undervaluation of
foreign currency (10 percent); currency volatility (eight percent); and
lack of external financing (five percent).
In terms of the main constraint on their company's exports, one-in-five
corporate respondents (21 percent) cited the lack of external demand,
while 14 percent pointed to trade barriers and an equal number cited
overvaluation of the domestic currency. Ten percent of corporate
executive polled indicated that currency volatility is the main
constraint on their company's exports.
Interest Rates: Asked how corporate borrowing costs would be affected in countries that
become more fiscally challenged, 35 percent of respondents said there
will be wider spreads compared to sovereigns, but a similar number (32
percent) expected the opposite, saying there will be tighter spreads.
Taxes: Half of all survey respondents (49 percent) believed that the banking
industry is most likely to see higher taxes as governments try to rein
in deficits. An additional third (32 percent) believe that energy
companies will see increased taxes, and a similar number (27 percent)
predicted an increase in taxes on natural resources. One-in-five global
executives (19 percent) expected that the telecommunications industry
will see an increase in taxes.
Other Government Action: In terms of actions that governments could potentially take in the next
12 months, nine-in-ten executives (90 percent) believed that there is
some chance their government will impose significantly higher reserve
requirements for banks, with government debt counting as reserves. An
equal number (90 percent) said their government may tax individuals at
higher rates over the next year. A similar share believed their
government could impose liquidity ratios (88 percent), implement
quantitative easing (88 percent), or impose higher taxes on
corporations (85 percent) in the same time frame. Other responses
Regulatory mandates on credit allocation
Requirements for below-market financing to the government
Exchange controls on capital outflows
Caps on interest rates that banks can pay on deposits
Said Marc Harris: "Investors are still processing the portfolio
implications of diverging fiscal and economic policies in the U.S.,
Europe and emerging markets. The U.S. has so far been reticent in
embracing fiscal consolidation and the potential long-term implications
of their government deficits, while Europe has already begun
implementation of austerity measures to deal with the peripheral
effects of the sovereign debt crisis and the potential of future debt
challenges. The opposing trajectories undertaken in the U.S. and Europe
are producing a sharp outflow of capital to emerging markets, and a
heightened potential for market volatility in the coming year."
About the survey
RBC Capital Markets commissioned the Economist Intelligence Unit to
survey 461 senior executives from around the globe (North America [38
percent], Western Europe [38 percent], Asia Pacific [14 percent] and
Rest of the World [nine percent], including both clients and
non-clients of the firm, on their outlook for the future of capital
markets. The survey was completed in January 2011. The respondents
included 211 senior executives from commercial and investment banks,
hedge funds, asset managers, pension funds, sovereign wealth funds,
institutional investors and private equity firms and 250 executives
from non-financial companies active in the global capital markets.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking arm of RBC
and is consistently ranked among the top 12 investment banks globally.
With over 6,000 employees, RBC Capital Markets is active globally in
fixed income, foreign exchange, infrastructure finance, ECM, metals,
mining and energy. Working with clients through operations in Asia and
Australasia, the UK and Europe and in every major North American city,
RBC Capital Markets provides products and services from 75 offices in
15 countries. For more information, please visit www.rbccm.com.
Note to Editors:
For a copy of the research paper related to the survey, please follow
the link below: http://www.rbccm.com/about/file-552024.pdf
For further information:
|Europe and Asia: ||RBC: Louisa Fairman - 44 (0)20 7029 7821|
| ||Greentarget: Dafina Grapci-Penney - 44 (0)20 7680 5052|
|North America: ||RBC: Kait Conetta - (212) 428-6409|
| ||Sanam Alaghband - (212) 618-5589|