Executive summary ........................................................................... 3
The extreme systemic risk in the system........................................ 7
The Financial system remains on a knife-edge .........................................................................7
What’s an appropriate Debt / GDP level? .................................................................................7
Assessing the scale of the potential de-leveraging still to come ............................................12
What are the solutions? ..........................................................................................................15
Is 2011 the last year of the credit cycle?........................................ 18
When does long-term history suggest the next recession will start? .....................................19
Banks – Exposures, funding and regulation.................................. 21
Peripheral exposure can trigger huge write downs ................................................................21
Funding requirements – focus on peripheral banks ................................................................23
Regulatory impact on capital requirements.............................................................................26
Bank liquidity – adequate thanks to ECB.................................................................................27
Bank capital relative value .......................................................................................................28
Conclusion ..............................................................................................................................29
Investment Grade outlook.............................................................. 30
Fundamentals improving on the back of earnings ..................................................................30
Technical outlook – credit offers right balance between govies and equities? .......................31
Issuance – volumes down but market access should be fine.................................................34
Valuations and relative value ...................................................................................................35
Conclusion ..............................................................................................................................37
Leveraged finance outlook ............................................................. 38
Fundamentals – improving and likely to stay strong ...............................................................38
Default outlook – dropping and could stay close to the floor..................................................39
Technical picture – quite encouraging.....................................................................................41
Issuance outlook .....................................................................................................................43
Valuations and relative value ...................................................................................................44
Conclusion ..............................................................................................................................47
Appendix: EU Peripheral Government & Bank Funding – Raw
data................................................................................................... 48

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