Scope Ratings: Greece fully protected from market shocks and rising spreads

Her Eleftherias Kourtali

The strongest EU architecture and debt profiles are protecting eurozone countries from rising borrowing costs and financial fragmentation, according to a report by Scope Ratings today.

Improved debt profiles of Greece, Italy, Portugal and Spain, flexibility in ECB asset purchases and progress towards fiscal union will limit the eventual expansion of risk premiums and their impact on sustainability. , notes the house

“Government bond yields in the periphery have risen sharply since February, reflecting a broader rise in eurozone bond yields and largely anticipating higher interest rates before the end of the year. However, the risk of serious financial fragmentation in “The eurozone remains low,” said Jakob Suwalski, director of Scope Ratings.

The risk premiums in Greece, Italy, Portugal and Spain are anticipating a tighter future monetary policy, especially after the confirmation of the ECB decisions in February to end the PEPP in March 2022. The central bank has also changed, according to Scope. guidance on the possibility of raising interest rates before the end of this year.

“We recognize that over-indebted eurozone governments are relying more comparatively on central bank asset markets to maintain favorable market conditions and are more sensitive to rising financing costs, given the need to refinance large debt of the public debt crisis “, notes Suwalski.

“The impact of higher returns on debt sustainability needs to be addressed in the context of significantly improved debt structures in the periphery,” said Giulia Branz, a Scope analyst. Greece, Italy, Portugal and Spain, he points out, have extended their average debt maturity over the past decade, which means that the cost of new debt is passed on for a longer period of time. Average issuance costs remain moderate by historical standards and, for most countries, lower than the cost of outstanding debt, thus supporting the continued reduction of the interest rate due to strong economic growth in the coming years. With higher inflation, real bond yields remain negative despite the recent rise in risk premiums, he explains.

At the same time, according to the house, flexibility has also become a key element of the ECB’s monetary policy. In December, PEPP’s reinvestment program was extended at least until 2024, including a temporary increase in net purchases under the classic QE, for a smooth exit from PEPP. The ECB may also restart PEPP in the event of an emergency, underlining its readiness to flexibly adjust its reinvestments in the event of market turmoil.

The EU 800 800 million of the EU Recovery Fund also favors countries with weaker economies, supporting an encouraging medium-term economic outlook. “All factors show a stronger commitment and a clearer path to long-term financial integration in the euro area,” Branz said.

In the long run, however, there are other challenges to the ability of governments in Greece, Italy, Portugal and Spain to maintain high levels of public debt, including the potential for future political instability, which could hamper efforts to implement the required reforms to make effective use of EU funding and address challenges such as unfavorable demographic trends and moderate to weak growth momentum, which exert structural pressure on their fiscal performance.

“Without significant reforms, structural factors will prevent any substantial debt reduction, which in the context of future interest rate hikes and monetary policy normalization will increase the vulnerability of these countries to financial shocks,” Suwalski said.