A Sign Europe’s Big Debt Pile Is Manageable Even as Yields Rise

(Bloomberg) -- Sovereign borrowing costs may be on the rise in Europe, but a bond-market metric illustrates why governments can relax for now.

The fastest inflation in decades is ending the low-rate era, but governments in the euro area have already locked in 461.85 billion euros ($522.5 billion) of funding in a pandemic-driven debt splurge. On top of that, the economic growth rate in Europe has never been this much higher than the average coupon on European sovereign bonds, suggesting the income nations generate from a growing economy will keep the debt burden manageable.

Sovereigns have seized on favorable funding conditions to refinance under the European Central Bank's public sector purchase program. The binge peaked when the pandemic hit, as nations turned to bond markets to fund the recovery. Now, the average coupon they pay bond investors is less than half the 4% pace the euro area is forecast to grow this year.

“This time around, the rise in yields is accompanied by a brighter growth outlook,” which is “very different” from the 2011 euro-zone debt crisis, said Michele Napolitano, head of western European sovereigns at Fitch Ratings. “From a credit perspective, the key concern would be if yields were diverging across different countries, which we are not seeing.”

With their refinancing needs met and support from the NextGenerationEU program, sovereigns can afford to cut back on debt issuance as the ECB prepares to end its pandemic-period bond purchase program at the end of March. Governments “want to be more nimble regarding their funding strategies, syndication or regular auction,” said Kevin Zhao, head of global sovereign and currency at UBS Asset Management.

To be sure, the pace of the euro-area recovery has started to slow after fresh coronavirus restrictions and global supply-chain disruption. The International Monetary Fund predicts the region's economic expansion will cool to 3.9% this year from 5.2% in 2021.

“Concerns about debt sustainability in some peripheral countries will come in 2024, 2025 when growth starts to slowdown,” said Zhao. “For this year, countries will have no funding problems.”

Elsewhere in credit markets:

EMEA

Germany's state of Berlin is the sole issuer offering bonds in Europe's primary market on Thursday, as bankers and investors await more clues on how quickly key central banks will tighten monetary policy.

Policy decisions from the European Central Bank and the Bank of England are due today, as they seek to manage surging inflation. The BoE is likely to deliver its first back-to-back rate rise since 2004
Investment-grade borrowers will be attracted to private debt from public bond market as the ECB phases out its pandemic emergency purchase program (PEPP) by March, according to a report by Scope Ratings
- “The gradual reduction of net asset purchases under the corporate sector purchase programme (CSPP) over the next few quarters will likely lure some bigger investment-grade rated companies back to Schuldschein,” wrote Sebastian Zank, deputy head of corporate ratings at Scope
Asia
Pakistan's plan to raise $1 billion via ESG eurobonds was the main news on an otherwise quiet day for the primary dollar-debt market in Asia.
- Last month, Asia dollar bonds suffered the biggest losses since March 2020, according to a Bloomberg index
- Singapore has reopened after the Lunar New Year holiday, although Hong Kong and China are still closed
Americas
Demand for non-financial primary supply was robust Wednesday as Valero Energy got nearly 10 times the orders of its originally announced $500m 30-year deal size, while IBM got more than 5 times its $1.8 billion three-part trade.
- In high yield, AMC Entertainment Holdings Inc. priced an upsized junk bond in its first offering since the early days of the pandemic
  - Its $950 million transaction -- boosted from an initial amount of $500 million -- will refinance the company's more expensive 10.5% notes it sold in April 2020
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas