Anxious About Government Debt, More of World’s Top Business Leaders Expect Governments to Cut Spending Than To Increase Taxes, According To Semi-Annual RBC Capital Markets Global Survey

Jan 31, 2011 | Corporate Member News

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 monetary policies.

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:

  • Government debt
  • Inflation risk
  • Trade policies
  • Interest rates
  • Taxes
  • 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 into account.”

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 included:

Regulatory mandates on credit allocation     81 percent
Requirements for below-market financing to the government   75 percent
Exchange controls on capital outflows      63 percent
Caps on interest rates that banks can pay on deposits    58 percent

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

Note to Editors:
For a copy of the research paper related to the survey, please follow the link below: 

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    

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