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EU sovereign issuers optimistic despite debt financing needs

Heads of debt finance for Europe's biggest economies said they would be able to cope with dramatically increased financing requirements at the Euromoney Bond Congress.

In the opening panel at the Euromoney Bond Investors’ Congress, sovereign debt managers from Germany, France, Japan and the UK put forward a collective calm face on their dramatically changed  circumstances.

They started off with the bad news, comparing how much they raised in the last financial year with how much they’re going to do in this. Germany has an additional 50% to raise – up from €213 billion to €323 billion; France has €330 billion to finance in bonds and bills – up from €270 billion last year; and the UK’s borrowing requirement has almost doubled – up from £80 billion, to a first estimate of £110 billion and now forecast at £146 billion ($208.6 billion). Japan’s finances are deteriorating at a far slower rate – a 5% increase to ¥1.32 trillion ($13.6 billion) – but nevertheless this is a massive number.

“I must say to everybody around the table, welcome to the club!” said Masaaki Kaizuka, director of debt management, Ministry of Finance, Japan.

But then came some good news – from Standard & Poor’s – which of all the rating agencies has probably taken the most active stance in analysing the impact of rising fund requirements on sovereign credit fundamentals.

“I expect many of the triple-A issuers to weather the storm,” said David Beers, head of the sovereigns rating group at S&P. As far as ratings migration goes, Beers said that the most he expects are modest moves down to the double-A level.

He also discounted the possibility of any default from a eurozone country or the single currency’s viability being tested by the economic and financial downturn – noting that even the weakest country, Greece, is still firmly in investment-grade territory at A–.

Philippe Mills, chief executive, Agence France Trésor, insists that it is liquidity, and not perceptions of credit quality, that are driving the widening in eurozone sovereigns’ spreads. However, that bold claim is somewhat contradicted by ratings actions from S&P on Portugal, Ireland, Greece and Spain.

The negative effect of hugely increased supply from the dramatic rise in European sovereign debt issuance is being countered by risk-averse investors’ flight to quality. All of the borrowers on the panel agreed that they had benefited from such flows, especially at the short end.

“We’ve seen a fundamental shift in the structure of government bond markets... increasing supply yet rates are declining. At some point, yields will rise again, most likely trigged by a change in monetary policy and a change in outlook,” said Robert Stheeman, chief executive, UK Debt Management Office.

See also “Sovereigns face a financing crunch” – available now online

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