EUROPE - The number of European institutional investors who see sovereign default as a "huge risk" has more than doubled in the last six months, according to Allianz Global Investors' (AGI) second RiskMonitor survey.

According to the survey, investors see market volatility as their biggest problem, with nearly nine out of ten respondents classing it as a major risk.

Elizabeth Corley, chief executive of AGI Europe, said that since the firm's first survey in the spring, problems for institutions had increased.

"Western Europe is engulfed by a crisis that has not just regulators but politicians and central bankers struggling to devise policies to contain risks of many natures," she said.

A total of 35% of institutions said they perceived sovereign debt default as a huge risk to achieving financial investment targets, up from the 14.7% of respondents who gave that answer six months ago. French institutions appeared more anxious about this issue, with 63% calling it a huge risk, while in Italy, 57.1% of respondents categorised it as such.

Compared with the first RiskMonitor survey, nearly every major risk indicator had risen on the scale, AGI said. Between April and October, the number of institutions seeing overall market volatility, current interest rates, liquidity and counterparties' creditworthiness as presenting a huge risk to their financial targets has almost tripled.

"We must now all admit that 2008-09 was not all of the Great Financial Crisis but merely its opening act," Corley said. It was only the eye of the hurricane that had passed, the survey found, and institutional investors were in a state of high alert, she added.

"In spite of greater attention to liability matching, four in every five investors still register a sharp drop in equity markets as a major risk to their financial targets," Corley said. "There is far more to be done in risk management but institutions are already shifting away from the tradition of bracing risk to asset class."

One positive finding was, she said, that a "surprising" number of investors now sought to decompose volatility by other factors.

The survey showed around 8% of investors believe managing risk by asset class is the way forward, while more than 28% favoured reformulating risk by major characteristics, such as duration and liquidity. A quarter of respondents were seen to prefer measures of expected loss such as value-at-risk.

"Investors, like the rest of us, are discovering there is less certainty than hitherto assumed in this world and they are adjusting their outlook accordingly," Corley said.

While the perception of financial risks was shown to have increased between April and October, there was less change in attitudes to the risk presented by regulatory and governance issues. But AGI noted that the knock-on effects of falling funding levels were apparent.

"Pressure from both sponsors and trustees is a major risk to achieving financial targets for twice as many institutions this autumn," it said.

The survey - conduced by IPE for AGI - included responses from 140 institutional investors managing total assets of €909bn, from 11 western European countries.

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