The governments of Italy (Baa3, stable), Spain (Baa1, stable) and Portugal (Baa3, stable) will need to continue to diversify their funding sources to meet their still very elevated gross borrowing requirements when the European Central Bank (ECB) ends new purchases of euro area sovereign debt at the end of the year, Moody’s Investors Service said in a new report.
Untitled “Governments of Italy, Spain and Portugal; Spain, Portugal better placed than Italy for transition to post-QE environment”, the report shows that debt-to-GDP ratios close to or above 100%, as well as continued budget deficits, mean that Spain and Italy will face gross borrowing requirements of around 17 and 18% of GDP respectively in 2019-2020, whereas the borrowing requirements of Portugal are somewhat lower at of 13-14% of GDP these years.
«We believe that Spain and Portugal are well placed to continue to manage the transition to a post-QE environment,» said Petter Bryman, a Moody’s Assistant Vice President — Analyst and co-author of the report. «Italy will face more significant challenges, although these are driven by domestic political and economic developments rather than the withdrawal of ECB support.»
Spain’s higher credit quality and robust demand from non-resident investors and Portugal’s increasingly diversified sources of funding leave them in a comparatively good position to continue to negotiate the transition to a post-quantitative easing environment.
Although Moody’s consider the risks of a liquidity crisis for Italy to be low, the agency stresses that the sell-off by non-resident investors from May 2018 means that managing the transition will be more challenging for Italy, despite the recent de-escalation of tensions with the EU over the 2019 budget.
The pace of purchases of euro area government bonds under the ECB’s quantitative easing programme (the Public Sector Purchase Programme — PSPP) has already slowed significantly compared to its peak in 2016 when the ECB purchased the equivalent of between 30 and 40% of the gross issuance of these countries.
The ECB will continue to reinvest the proceeds of maturing bonds for the foreseeable future, although Moody’s estimates that the figure reinvested in 2019 will amount to around 10% of the gross borrowing requirements of Spain and Portugal and 6% of those of Italy in 2019.
In recent years, Italy, Spain and Portugal have successfully extended the maturity of their borrowing, locking in today’s low rates for a considerable period. Government borrowing rates have so far not notably increased as the ECB has reduced the pace of its QE purchases, meaning that the final phase-out of new PSPP purchases at the end of this year in itself is unlikely to lead to an immediate rise in borrowing rates for the three countries.
Elevated gross borrowing requirements can impact Moody’s assessment of sovereign credit quality in two ways. Firstly, if they lead to more elevated government borrowing costs, this can impact Moody’s assessment of a government’s fiscal strength.
Secondly, the risk that the government will not be able to raise the necessary funding to meet its obligations forms part of the assessment of a sovereign’s susceptibility to event risk.
Original Story: Moody’s
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Edition: Prime Yield
