Jan 11 - The resumption of European government bond supply this week comes ahead of a modest fall in overall borrowing needs in 2013, Fitch Ratings says.
Nearly all European governments are expected to have lower financing needs this year than in 2012, reflecting both budget cuts and falling bond redemptions, and we forecast a third consecutive annual fall in their total borrowing. Spain’s gross financing needs, however, will not fall this year and are expected to be around EUR200bn (excluding within-year T-bill rollover).
In December, we estimated that European governments - those in the eurozone, plus Denmark, Iceland, Sweden, Switzerland, and the UK - will need to borrow EUR1,765bn from the market in 2013 to finance deficits and roll over existing debt, down 6.6% from last year. We forecast aggregate gross borrowing for eurozone governments to fall 7% to EUR1,428bn in 2013.
Cutting the debt stock will take longer. Indeed, as we noted in our Global Sovereign Outlook for 2013, fiscal consolidation will continue, but a less aggressive targeting of headline deficits by eurozone governments means some debt/GDP ratios will peak higher and later than might have been the case (we expect Spain’s debt/GDP to peak at 95% in 2015, for example).
Nevertheless, we think that changes in debt flows, rather than debt stocks, matter more in easing the sovereign debt crisis. If budgetary flows can be corrected to the point where public debt starts to fall (even given modest trend GDP growth), it should set the scene for a resolution of the crisis, with public debt then falling to more sustainable levels over the course of the decade.
In addition to Spain, Ireland is another sovereign bucking the trend of lower gross borrowing and is set to increase its borrowing this year as it returns to the bond market. This process gained momentum this week when Ireland priced a EUR2.5bn increase of its 5.5% October 2017 bond on 8 January to yield 3.316%. The debt sale is another step in the progress made towards regaining full market access. Fitch revised the Outlook on Ireland’s ‘BBB+’ rating from Negative to Stable on 14 November 2012 - the first positive eurozone sovereign rating action since 2009. Fitch expects Ireland to regain full market access by year-end, but this is not assured and vulnerable to an intensification of the eurozone crisis or worse than expected economic and fiscal outcomes.
Including Ireland’s tap, eurozone government bond supply this week has totalled over EUR25bn via auctions and syndications.
New bonds (as distinct from taps) issued after 1 January include collective action clauses (CACs), as set out in the agreement to establish the European Stability Mechanism. We make no rating distinction between existing eurozone sovereign bonds and new bonds with CACs, reflecting our long-standing view that including CACs does not materially increase default probabilities. We would treat an adverse change to the original terms and conditions of rated securities, designed to avoid a default, as an event of default if it met our Distressed Debt Exchange criteria, even with the requisite support of bondholders under CACs.
A fuller discussion of CACs is also included in our 2013 Global Sovereign Outlook.
The Sovereign Outlook and our December Special Report, “European Government Borrowing in 2013” are both available at www.fitchratings.com.