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End of ECB QE and rate rises 'manageable' for most euro area debt issuers

Publication Date: 27 Jun 2018 - By ReachX Team By ReachX Team
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Macro Equity Fundamental Fixed Income/Credit UK EU ex-UK MENA

The European Central Bank's gradual paring back of stimulus will lead to tighter financing conditions and a modestly paced increase in borrowing costs, which will be manageable for most euro area debt issuers, according to a new research.

In a report for its clients, Moody’s said public issuers are relatively insulated from an increase in market yields over the short- to medium-term. Under the ratings agency's central scenario of gradually rising rates, euro area sovereigns' interest burdens will decline further in the coming years as new funding at lower rates will replace higher-yielding maturing debt. 

However, this benefit will fade over the longer-term as the yields on maturing debt decline. While the negative impact of higher rates on non-financial corporate will depend on their creditworthiness and funding profiles, most companies can withstand rising rates, as steady growth in the euro area will support their credit quality. 

“Higher borrowing costs could mostly affect low-rated corporates, but this factor alone is not likely to trigger downgrades,” Moody’s said.

The withdrawal of stimulus will have a more mixed impact on banks than other issuers, depending on their individual funding mix and ability to re-price interest on loans, it added. Spanish and Italian banks, as a whole, may see a credit positive impact albeit with some lags due to their large share of interest-sensitive assets compared with liabilities and a high share of variable-rate loans in their mortgage books.

Rising yields are credit positive for insurers, but investment returns will continue to decline in the short term. For life insurers, higher rates will reduce capitalisation pressure and decrease the risk that their investment returns will fall below the rates they have guaranteed to policyholders.

Rising rates are credit neutral for structured transactions backed by consumer and corporate debt, except for commercial mortgage backed securities (CMBS) which will see a negative impact.

"The pace of monetary policy normalisation in the euro area will be gradual and the ECB will maintain a large balance sheet as well as an ample degree of policy accommodation," said Colin Ellis, Chief Credit Officer for EMEA region at Moody’s. 

"While manageable for most issuers, rising rates will affect some more than others at different horizons, mostly depending on the terms of the interest payments on their outstanding debt as well as on the gap between the interest paid on maturing debt and new debt.”

 

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