Fitch Ratings, the risk qualification agency, expects that European Union state member debt auctions will be cut by 7 percent this year. Fitch described this change as a “modest fall in overall borrowing needs in 2013.”
“In December, we estimated that European governments–those in the eurozone, plus Denmark, Iceland, Sweden, Switzerland, and the UK–will need to borrow €1,765 billion from the market in 2013 to finance deficits and roll over existing debt,” Fitch analysts explained in a new report. The figure would mean a reduction of 6.6% from last year.
Their forecast pointed at an aggregate gross borrowing for eurozone governments of -7% year on year or €1,428 billion in 2013.
Nearly all EU governments are expected to have lower financing needs this year than in 2012, reflecting both budget cuts and falling bond redemptions, and Fitch expects a third consecutive annual fall in their total borrowing. Spain was remarked as an exception, though: “Spain’s gross financing needs, however, will not fall this year and are expected to be around €200 billion, excluding within-year T-bill roll-over.”
Cutting the debt stock will take longer. Fiscal consolidation will continue, experts indicated, 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. Spain’s debt/GDP would peak at 95% in 2015.
Fitch also noted that European public debt volume should not be the main worry of investors in the new year. The agency found 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.”
Analysts keep an eye on peripheral economies of the euro area. “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 €2.5 billion 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 believes Ireland will 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 €25 billion via auctions and syndications.
New bonds issued after 1 January include collective action clauses or CACs, as set out in the agreement to establish the European Stability Mechanism, that the agency said it does not make 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.