Big year for European sovereign bonds

Big year for European sovereign bonds: "

Big year for European sovereign bonds

With national deficits soaring around the world and the recent panic over Greece’s economic crisis, it has been clear for some time that 2010 is shaping up as a big year for sovereign bond issues.

Nowhere more so than in Europe.

Now, Fitch Ratings has put a figure on it, estimating in a new report that European states will need to borrow €2,200bn ($3,100bn) from capital markets this year to finance their budget deficits.

The projected borrowing is a 3.7 per cent increase on the €2,120bn raised in 2009, says Fitch, as governments continue to issue sovereign bonds and short-term bills.

This record issuance, in turn, will put pressure on public finances amid rising yields and volatility.

And, as Fitch notes, short-term sovereign debt issuance — which has to be rolled over once every three or six months — will raise refinancing risks for European governments, leaving them increasingly at the mercy of bond markets.

An expected surge in issuance of short-term Treasury bills in France, Germany, Spain and Portugal increases the market risk facing these countries — notably exposure to interest rate shocks, adds Fitch.

Overall, among Europe’s top issuers this year, France will be the biggest, raising an estimated €454bn. Then comes Italy at €393bn, Germany at €386bn and the UK at €279bn.

As a percentage of GDP, borrowing is expected to be the largest in Italy, Belgium, France and Ireland — at about 25 per cent.

The year is likely to see greater volatility as the liquidity premium enjoyed by sovereign issuers diminishes amid hastening recovery — and that, says Fitch, means a material risk of a rise in government funding costs as yields rise. The agency continues:

“Combined with concerns over the medium-term fiscal and inflation outlook, this will likely cause government bond yields to rise, potentially quite sharply.”

On the bright side, high-grade sovereigns are unlikely to have problems accessing markets, though they will have to pay higher rates, according to Fitch.

And separately, on another happy but related note: if there are any concerns about investor uptake for this tidal wave of European sovereign issues, just look to Greece.

As the FT reports on Tuesday:

International alarm over Greece’s debt crisis abated on Monday when investors flocked to buy the government’s first bond issue of the year, an indication that it may run into less trouble than anticipated in meeting its short-term financing needs.

Investors placed about €20bn ($28bn) in orders for the five-year, fixed-rate bond, four times more than the government had reckoned on. However, in a sign that Greece is being made to pay for years of fiscal profligacy, the bond carried a record high interest rate spread relative to the rate for German bonds, the eurozone’s benchmark.

The message seems to be, give them enough incentive and investors will overcome anything — even fear of a Greek implosion."