S&P: Low bond yields in eurozone cause complacency

Euro-area bond yields near record lows are leading governments to be complacent, according to Standard and Poor’s head of sovereign ratings Moritz Kraemer.

The reduction in borrowing costs across the region, resulting from European Central Bank (ECB) stimulus measures, risks removing governments’ incentive to improve their fiscal position, Kraemer said during an interview on Bloomberg Television’s On The Move with Jonathan Ferro in London.

“The risk is indeed of complacency — that national governments think the rates are at historic lows because of their achievements on the reform agenda, while in fact, most of it is due to the monetary policy stance,” Kraemer said.

His comments coincide with ECB President Mario Draghi and France’s nominee for European Commissioner Pierre Moscovici each saying that nations within the currency bloc needed to act on fiscal deficits.

After Draghi cut interest rates and announced new stimulus to spur the region’s economy on September 4, the average yield on euro-area government debt dropped to the lowest since at least 1994, according to Bank of America Merrill Lynch indexes.

Spanish bonds led a decline in yields across the region as investors ignored such warnings amid the ECB’s programme to expand stimulus.

The average yield to maturity on the region’s debt was at 1.073% yesterday, down from a 2008 peak of 4.933%, the Bank of America Merrill Lynch indexes show.

It slid as low as 1.012% on September 5.

“Europe is not creating growth or jobs, and nations must cut debt levels,” Moscovici said in an interview on France2 television.

“France reduced growth forecasts on September 10 and said its budget deficit would widen for the first time in five years, fuelling debate on whether lawmakers were doing enough to strengthen the euro area’s second-largest economy in the wake of the debt crisis.

Bond investors are more optimistic about the euro-area’s peripheral nations than the rating companies, Michele Napolitano, a director at Fitch Ratings said at a conference in London last week.

The company won’t raise credit ratings until improvements in the nation’s fiscal situations start feeding through to their economies, Mr Napolitano said.

Investors largely disregard ratings companies’ opinions on the creditworthiness of sovereigns, reflecting a shift to a focus on in-house analysis.

Bloomberg