A majority of investors expect the euro zone's debt crisis to end with massive central-bank buying of bonds, but almost a quarter expect the breakup of the currency bloc, a Barclays Capital survey of more than 500 institutional investors showed.
The survey indicated investors have come to accept that only drastic, coordinated action by the euro zone's 17 members will contain a sovereign-debt crisis now widely seen threatening economic growth well beyond the currency union's borders.
Of the 500 investors surveyed, 56% expect the European Central Bank will undertake large-scale buying of sovereign debt from troubled countries like Italy and Spain, with some seeing fiscal union as the end result.
Those answers jibe with the market's reaction to the ECB's plan, announced Thursday, to provide dollar funding to troubled banks in coordination with other central banks. While the euro initially surged on the news, the currency has since given back those gains, as investors began to doubt that the funding move went far enough. The euro traded at $1.3795 late Friday in New York, down 0.6%.
"Many investors think that some form of quantitative easing is likely [in Europe]," said Paul Robinson, the London-based head of foreign-exchange research at Barclays Capital and one of the main authors of the survey.
But 24% of those surveyed said that they expect a euro-zone breakup lies at the end of the sovereign debt crisis. Barclays hadn't included this response option in previous versions of its quarterly survey. In the bank's second-quarter survey, only 1% expected sovereign-debt restructuring "in many countries, leading to a euro-zone breakup" in the next year.
The survey suggests the euro zone's debt crisis has become the most prominent concern by far for global investors. The number of respondents expecting some adverse spillover onto emerging markets almost doubled to 30% compared with the previous quarter.
"The chances of a hard landing in China have fallen, U.S. issues seem to matter less and worries about a double-dip recession have eased somewhat. It is all Europe," Mr. Robinson said.
Nearly 70% of foreign-exchange investors surveyed expect the euro zone's problems to be the main driver of currency markets in the next three months, while 60% of equities investors see a potential European banking crisis as the biggest risk to global equities markets.
"Most people I speak to expect a Greek debt restructuring," Mr. Robinson said. "The big uncertainty is when and in what form that will happen. As long as the restructuring is orderly, many investors would view it as positive for risky assets."
So far this quarter, the Stoxx 600 index of European shares has lost more than 15%, while the Standard & Poor's 500-stock index has shed almost 9% as investors have fled relatively risky equities and piled into safer bets like U.S. Treasurys and into currencies like the dollar and Swiss franc.
The euro shed almost 20% against the franc this year, before the Swiss National Bank introduced a floor under the euro's value at 1.20 franc, to defend the interests of Swiss exporters hurt by the franc's appreciation.
Most respondents now expect the euro to trade below $1.35 against the dollar in six months from almost $1.39 currently, despite the expectation that the U.S. Federal Reserve will engage in some form of further monetary stimulus, a step that ordinarily might be expected to drive the dollar lower.
read more: Olympus Wealth Management
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