European governments’ commercial medium- to long-term (MLT) borrowing will likely reach a historical peak at €1,446 billion in 2010, according to Standard & Poor’s Ratings Services seventh pan-European sovereign issuance survey. This is up €52 billion from the previous peak of €1,394 billion in 2009, according to the survey, which consolidates estimates of borrowing activity of all 46 rated European sovereigns in 2010.
Among the five largest European sovereign borrowers, we expect the U.K. to borrow an estimated €38 billion less than in 2009, after very high gross MLT borrowing of €257 billion in 2009. Our estimates of gross borrowing are higher by €41 billion in Germany, and by €26 billion in France, reflecting our expectation that there will be a deterioration in their public finances in 2010. We also estimate large absolute increases in MLT borrowing in Spain (€21 billion), Russia (€20
billion), Turkey (€19 billion), and The Netherlands (€13 billion).
We also believe it is likely that net MLT commercial borrowing (that is, gross debt net of maturing debt) will reach another peak in 2010 at €762 billion, up €82 billion from its 2009 level, and almost six times the level of 2007. We believe falling amortizations are the main reason for the even stronger increase in net borrowing. Short-term debt levels also remain high at 10.9%, well above their share of about 7% before the economic and financial downturn, but slightly down from 11.7% in 2009.
In our view, debt-related sovereign vulnerabilities have increased, particularly in the Eurozone, where we expect deficits and government borrowing will likely rise further to new peaks.
Changes in sovereign risk characteristics, as well as in risk perception by investors can lead to significant changes in financing costs, as experienced by a number of sovereigns over the past 18 months, Greece being the most recent example. Furthermore, because central banks are set to phase out liquidity support to the financial sector, as well as quantitative easing measures over 2010, the ensuing drop in demand for government debt could lead to rising benchmark yields. The resulting fiscal pressure from a sustained increase in financing cost could be significant in our view. We estimate that a sustained 300 basis points (bps) shift in the yield curve would by 2015 amount to extra annual interest payments of 3.9% of 2010 GDP for Greece, 2.6% for Portugal, and 2.5% for Italy and the U.K.
