Credit ratings are still at risk

The EuropeanCentral Bank’s new bond purchase scheme, the Transmission Protection Instrument (TPI), will reduce the fiscal risks associated with a rise in interest rates but will not protect eurozone member-states from higher borrowing costs, Fitch Ratings warned in a statement Wednesday.

Simply put, highly indebted eurozone members, such as Greece (which Fitch does not mention at all in its statement), Italy and Spain, will continue being vulnerable to possible credit downgrades in an environment where bond yields are expected to be much higher than in recent years.

Fitch estimates that this high-yield period will last at least through 2024.

Implementation of the TPI “should reduce the risk that sharp increases in interest costs negatively affect debt dynamics in highly indebted eurozone sovereigns, such as Italy and Spain,” Fitch says.

“Nonetheless, it does not place a floor under sovereign ratings, since rating assessments would remain guided by broader credit fundamentals. We expect bond yields over 2022-24 will still be much higher than in the period since 2015. This will translate into higher interest payments over time, increasing fiscal strains in the eurozone’s high-debt sovereigns,” Fitch adds.

Of course, Greece, having gone through a protracted financial crisis that saw its bond yield soar to over 25 percent in June 2012, is unlikely to relive those disastrous moments. But, still, its yields are rising, throwing off its debt repayment schedule.

Italy, whose 10-year treasury bond yielded about 0.5% as recently as mid-August 2021, has since seen the yield take off to as high as 4.18 percent 10 months later, in mid-June 2022. It has dropped somewhat since, but still hovers above 3 percent. In Greece, the yield, as low as 0.6% in August 2021, reached 4.7% in June and, like Italy, now hovers around 3%. The spreads have tightened too, from 305 basis points (3.05 percent) in June to 216 bps currently.

In any case, the bond market conditions show that the era of historically low, even negative, yields is over, for the time being. But the TPI at least should keep yield hikes relatively contained.