"Events on the European periphery have taken another turn for the worse," says Bryn Jones, manager of the Rathbone Ethical Bond Fund.
"Markets are less inclined to accept reassurances from the bureaucrats and are taking their cues from leaks on debt-restructuring. This is a good juncture to start de-risking the portfolio in light of what could be a very nasty mess."
Jones, who is also fixed income director at Rathbone Unit Trust Management, adds: "The problem is that any funding support will not provide a miracle cure."
However, it's the contagion to larger economies that looks highly dangerous, he continues.
"There are two issues here. Firstly, most sovereign peripheral debt is typically held to maturity, so any significant restructuring will lead to significant write-downs. It's the indirect exposure that the core economies have to the peripherals, through loans and the banking system, which is really going to hurt.
"So whilst the European banking system, from a capital perspective, might withstand a restructuring of the ‘PIGS', we are worried that it won't be able to circumvent the indirect impact of any large scale restructuring event."
Jones cites research which suggests that Germany's banking exposure to the peripheral banks is a massive 80% of Tier 1 capital (the capital which theoretically provides protection against unexpected losses).
"With the situation potentially one big debt-bomb waiting to explode, we are avoiding banking names with significant exposure to peripheral Europe, and are also reducing our tier one holdings.
"Instead, we are looking at names with a healthy distance from any peripheral default event, but without giving up on yield. Ultimately, in such a distressed scenario, any kind of risk asset will come under pressure."
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