Her new instrument European Central Bank against fragmentation will reduce fiscal risks, which increase in interest ratesbut that won’t protect eurozone states from higher borrowing costs, she warns. Fitch Ratings.

As Dom explains, the TPI tool could mitigate the debt sustainability risks of vulnerable countries such as Hellas, Italy and Spain as the ECB continues to tighten monetary policy, but this is not support for their credit ratings as they will continue to be driven by broader credit fundamentals. The House of Representatives expects that in any case, eurozone bond yields in the period 2022-2024 will continue to be much higher than in the past, and this will lead to higher interest payments over time, which will increase fiscal pressure on heavily indebted countries.

Less than 9% of eurozone government bonds now have a negative yield, compared with more than 70% in 2020-2021.

However, the market picture clearly shows that we have already entered an environment of higher borrowing costs compared to historically low and even negative bond yields in 2020-2021, and this is due to a 180-degree monetary policy reversal. central banks. Characteristically, less than 9% of eurozone government bonds now have a negative yield compared to more than 70% in 2020-2021.

While eurozone bond yields and spreads have fallen significantly since mid-June and when the ECB held an extraordinary meeting that decided to speed up the development of the new tool, they are still far from the record lows set in the middle of the pandemic when monetary policy was weak. From a high of 4.7% reached by the yield of Greek 10-year bonds on June 14 and 305 b.p. that touched the spread fell more than 30% to 3% and 216bp. respectively today. However, this cannot be compared to the 0.6% and 99 pv that shifted in August 2021. In Italy, from 4.18% and 255 b.p. in mid-June, the 10-year yield moved to 3.06%, and the spread – to 219 bp, but against 0.55% and 97 mp. summer 2021.

The activation of PEPP flexible reinvestment from July 1 also played a major role in the recent improvement, as the ECB used gains from bond redemptions in Germany, France and the Netherlands to buy more than €17 billion worth of Greek, Italian, Spanish bonds. and Portugal. However, volatility remains high, and this was demonstrated in yesterday’s session when eurozone bonds were sold off strongly due to new statements from Fed officials that aggressive interest rate hikes are on the table, thus undermining market hopes for easing position of the central banks of the Fed amid fears of a recession in the economy. Returning to Fitch’s analysis, the chamber nonetheless believes that TPI will face the risk of a very sharp increase in bond yields due to higher interest rates. And while there is uncertainty about how this will work in practice, Fitch expects the ECB to activate TPI quickly if fragmentation risks appear to materialize as it remains set to avoid the level of fragmentation seen in 2011-2012 gg. or in March 2020. This should thus mitigate the risk of a sharp increase in interest costs negatively affecting debt dynamics in highly indebted eurozone countries. However, this is not a panacea, as it is clear that borrowing costs will remain high for at least the next two years, putting pressure on countries’ budgets.