European markets seeing surging credit risk, analysts disagree on meaning

Following plummeting shares and sinking equity valuations, some analysts looking at the European market have begun openly wondering if investors should be a more concerned about credit risk assessments. The price-to-book ratio of the Stoxx Europe 600′s banks, which has been a key measure of the sector's value  and health, now has sunk to 2012 levels, reflecting the volatility and weakness of immediately post-crisis Europe. Recovery has been considered lackluster, with non-performing loans in Italy a particular pain-point. 

"Even with this surge in risk, analysts struggle to agree on what it might mean for future market stability."

Even with this surge in risk being well-documented, analysts struggle to agree on what it might mean for future market stability. Credit default swap prices have risen significantly, but still remain lower than 2012.

"It seems like equity markets are pricing in the risk-off mood," said Jakub Lichwa to the Wall Street Journal. "Credit markets are lagging that, and the pricing seems relatively optimistic."

Lichwa points out that the nature of the new market is periodic surges and falls in risk, which ultimately pose minimal threat of full-scale economic disruption. Yet is is of limited comfort to the analysts at Bank of America Merrill Lynch.

"Risks are not contained any more within the EM/oil related names," reads a research note recently published by bank analysts Ioannis Angelakis, Barnaby Martin and Souheir Asba. "Global growth outlook fears and risks of quantitative failure have led to weakness into cyclical names. Add also the recent sell-off in financials and you have the perfect recipe for a market sell-off that looks and feels systemic."

Regardless of definitive answers, analysts will continue to monitor the European market for credit risk in efforts to avoid the economic devastation of the pre-2012 crisis.

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