* Banks deserted by funds spooked by sovereign woe
* Sell-off in financials will spread beyond France
* Euro zone needs political overhaul to resolve crisis
By Sinead Cruise and Cecilia Valente
LONDON, Aug 11 Long-only fund managers are
pulling their money out of euro zone banks and sovereigns,
worried the region's monetary union has neither the political
cohesion nor financial firepower to prevent a re-run of the 2008
Even without a formal fiscal union in place, investors say
they are starting to see all euro zone states as financially
accountable for one another's solvency, sparking a stampede to
economies with greater freedom to plot their way out of the
crisis, like Switzerland, Britain, the United States and
"We have colossal debt burdens in some jurisdictions,
colossal budget deficits and an inability to forge political
unity at an early stage to short-circuit fears," Stephen
Snowden, fixed income manager at 48 billion pound funds firm
AEGON Asset Management, said.
French banks already reeling from writedowns on troubled
sovereign debt suffered a dramatic sell-off on Wednesday amid
fears the country could be called on again to bankroll rescue
packages for the likes of Italy and Spain.
Those falls came a day after spreads on German credit
default swaps widened beyond their UK equivalent for the first
time, reflecting worry that Europe's largest economy was being
dragged down by its efforts to support the euro zone laggards.
Sales of French bank paper and stock -- as well as those of
other major lenders seen to be infected by exposure to the Euro
zone -- look likely to accelerate as long-only investors hurry
to offload risk, fund managers said.
Snowden said AEGON had slashed exposure to banks in its
Investment Grade Bond fund by more than a quarter in the past
four weeks. He cited BNP Paribas , Unicredit ,
Credit Agricole and Belgium's KBC among its
"The credit market is substantially broken as we speak,"
Another fund manager at a different global investment house
running around $100 billion in assets blamed the current
volatility on "undue complexity" in the balance sheets of
financial institutions -- making it hard for investors to track
exposure to troubled credit. This is a popular criticism that
the recent round of European bank stress-tests has failed to
"(Price volatility) will spread across a broader set of
institutions. I do not see why they picked on the French banks,
you could name just about any bank ...and I think you can name
any of the international insurers," the manager said.
"What you have got is an enormous set of assets, an enormous
set of liabilities and very thin margins in the middle. If you
are not exactly clear where you are in those enormous books, you
have a high level of risk in the business."
Fund managers are stretching investment mandates and
guidelines on hedging tools to their limits in an effort to
protect their clients and avert a wave of redemptions that could
hurt battered stock markets even more.
But making those unplanned bets pay requires canny reading
of political runes as well as economic ones: a gamble most
investment managers are unwilling to take.
Jean-Louis Nakamura, Chief Investment Officer in the asset
allocation group at Lombard Odier Investment Managers said only
a "thorough and rapid institutional revolution" in the euro zone
would be sufficient to soothe market panic and boost demand for
stocks and bonds of its banks and governments.
"While the U.S. suffered a one-off political problem, it
doesn't have a deeper institutional issue. In contrast, the
eurozone's structures for coping with its debt problems at the
relevant monetary union level aren't even in place, let alone
operational," Nakamura said.
Managers said a reversal in European Central Bank policies
on quantitative easing and a rapid launch of euro bonds could
slow a sell-off and even coax bargain-hunters back to the
markets, but most are planning a long stay on the sidelines.
"There's a few of us out there who got badly burned in 2008
and don't think it is something we want to revisit," said
"Clients rightly want answers when we get it wrong -- if you
buy more while all this is going on, you have signed your own
(Editing by Sophie Walker)