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Net Net: Promoting innovation and managing change

Investors See Less Need for 'TARP Moment' in Europe

Bond investors appear to have come in off the ledge as it relates to the European debt crisis.

Whereas a month ago almost everybody in the credit market was expecting the debt-laden euro zone to need a huge market reaction before taking the appropriate actions, that number has come down substantially, according to a survey from Bank of America Merrill Lynch.

The poll of credit investors had found in October that 99 percent were looking for a “TARP moment,” in Europe — a reference to the Troubled Asset Relief Program instituted in the U.S. in 2008 to recapitalize banks after the financial crisis.

The program wasn’t implemented, though, until after a major market tumble that forced Washington’s hand.

European policymakers have come under fire for being slow to implement measures that would address the sovereign debt of countries such as Greece and Italy and how losses associated with that debt would affect banks holding those bonds.

U.S. credit investors, though, now see a “major European shift on their crisis from denial to being on the case and doing something about it,” Hans Mikkelsen, BofAML credit strategist, said in a research note regarding the November survey.

“As a result, investors are now fairly equally split between a camp that thinks Europe still needs a ‘TARP moment’ — i.e., a big selloff in the markets that prompts more decisive intervention — and the other camp that believes Europe will be able to get through or muddle through its crisis,” the note said.

Political leaders have pledged help through the European Financial Stability Fund, and Greece has agreed to a near-default scenario in which it discounts the value of its bonds in exchange for austerity measures aimed at getting the nation’s fiscal house in order.

Though the European crisis looks far from being settled and markets remain volatile, the credit crowd at least appears a bit more sanguine.

Among those who think that Europe will get through, “the belief is that either the current plans are sufficient to arrest the crisis, or will be modified appropriately,” the analysis said.

Of course, the downside of such sentiment surveys is that they often can be contrarian indicators — in other words, when investor sentiment starts to shift strongly in one direction, it can mean that complacency is setting in and opening the markets for a shock.

One of the most prominent voices in the credit markets worries that leadership is still lacking when it comes to wrestling with euro zone debt issues.

“We are all living through a very consequential time,” Mohamed El-Erian, co-CEO at bond fund manager Pimco, said in a CNBC interview.

“Look at what’s happening in Europe, look at what’s happening here,” he continued. “The global economy has lost many of its anchors, many of its financial anchors, many of its economic anchors. It’s a troubling time, it’s an unsettling time, it’s a time for coming together. What we’re lacking in this country and what we’re lacking in Europe…is people coming together for a common purpose to get us out of this mess.”

Indeed, other responses in the credit survey show misgivings, even if the expectations for the dourest scenarios have ebbed.

The European crisis will get worse before it gets better over the next three months, according to 44 percent of respondents, while just 18 percent think the situation will improve in that time frame.

“Despite the passage of the EFSF and the 50 percent agreed-upon haircut of Greek debt, the crisis has not been contained,” Daniel Aaronson and Lee Markowitz, at Continental Capital Advisors in New York, wrote in an analysis. “Ireland and Portugal have been shut out of the capital markets. The problem is spreading.”

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