By Simon Miller
European fixed-income investors think the eurozone fiscal pact would not solve the crisis according to a survey from Fitch Ratings.
The survey findings come as the eurozone tries to deal with the election of Francois Hollande as French president and Greece's failure to form a coalition government.
The bond markets have reacted badly to the ongoing situation with investors fleeing to safe haven sovereign debt of UK and Germany.
The UK sold £2bn of 30-year gilts at average yields of 3.224%, compared with 3.431% at March's auction with 2.22 bidders for every bond compared with 1.17 bids two months ago.
Germany sold €4.032bn (£3.249bn) of five-year bonds at a yield of 0.56% compared with 0.8% at its last auction although demand was slightly down at a ratio of 1.4 compared to 1.8 previously.
According to Markit, the UK has a 6% probability of default while Germany had a 7% probability. In comparison, Spain - troubled by a housing crash-hit banking sector - saw its five-year credit default swaps trading at 512 basis points implying a 35% chance of default over the next five years.
According to Fitch, 58% of fixed-income investors thought the fiscal pact was positive but marginal in solving the crisis, while only 25% regarded it as an important policy innovation bringing crisis resolution closer; 17% view it as an irrelevance.
Respondents also expressed a more negative view on fundamental credit conditions for the sector - with 71% believing these will deteriorate, up from 58% in the Q112 survey.
In addition, investors were also concerned about refinancing prospects, with 79% voting it the most challenged sector - an all-time-high. This dissatisfaction resulted in 49% of investors electing developed sovereigns as their least favoured investment choice. This is up from 31% in the last quarter - and is a new high, beating the 46% recorded in Q210 during the midst of the Greek crisis.
Fitch commented: "We expect the eurozone to 'muddle through' the crisis as economic adjustment proceeds, combined with gradual (if halting) steps towards closer fiscal and economic integration. However, other outcomes cannot be ruled out, particularly until economic recovery is underway and unless there is greater progress in reforming the eurozone."