Fitch notes that several European governments sharply increased their stock of short-term debt in 2009, resulting in an aggregate 20% year on year increase, compared to 2008. France and Germany each covered over half of their net borrowing last year through increased treasury-bill issuance whilst for Spain (AAA/Stable Outlook) and Portugal (AA/Negative Outlook), the share was close to a third. The total stock of short-term debt (less than one-year original maturity) for European governments covered by today's report is EUR766bn.
Douglas Renwick, Author of the report and Associate Director in Fitch's Sovereign group said, "The increase in the stock of short-term debt is a source of concern to Fitch as it increases market risk faced by governments, notably exposure to interest rate shocks."
Last year, financing conditions were favourable for most European governments, with low yields and increased demand from the private sector. However, 2010 is likely to be characterised by greater volatility in European government bond markets as the 'liquidity premium' enjoyed by sovereign issuers diminishes - driven by returning liquidity in other markets and a recovery in investor risk appetite, combined with market concerns over the medium-term fiscal and inflation outlook.
Consequently, Fitch believes government bond yields are likely to rise, potentially quite sharply. However, it also believes it is unlikely that large, highly rated sovereigns will face hard constraints in accessing market funding on the scale required, albeit at more expensive rates. The agency also notes that relative pricing is now much more dispersed between European governments since the onset of the crisis and that this trend is likely to persist.
