European governments' borrowing will increase marginally to €2.2 trillion (Dh11.2trn) or 19 per cent of GDP, from the market this year to finance large deficits and roll-over existing debt, according to estimates by Fitch Ratings.
Gross borrowing in absolute terms is projected to be the largest in France at €454bn, Italy at €393bn, Germany at €386bn and the UK at €279bn. As a percentage of GDP, gross borrowing is expected to be largest in Italy, Belgium, France and Ireland, all accounting for around 25 per cent.
Last year, financing conditions were favourable for most European governments, with low yields and increased demand from the private sector whose savings rate rose sharply.
At the start of 2009, Fitch estimated a €1.99trn borrowing requirement for the year. In the event, the agency expects this figure will have been closer to €2.12trn – or 17 per cent of GDP – despite the lower than expected fiscal costs of bank support due to larger than expected deficits.
A notable development is that France and Germany each covered over half of their net borrowing through increased Tbill issuance. For Spain and Portugal the share was close to a third. The increase in the stock of short term (ST) debt is a source of concern, as it increases market risk faced by governments, notably exposure to interest rate shocks.
The ratings agency believes that European government bond markets are likely to be more volatile in 2010 as compared to 2009 and there is a material risk of a significant rise in governments' cost of funding from historic lows in 2009.
As liquidity in other markets and investor risk appetite recovers, the "liquidity premium" enjoyed by sovereign issuers is diminishing. Combined with concerns over the medium term fiscal and inflation outlook, this will likely cause government bond yields to rise, potentially quite sharply.
While this highlights the urgency of credible fiscal consolidation programmes, the agency considers it unlikely that high grade sovereigns will face hard constraints in accessing market funding on the scale required, albeit at more expensive rates.
Fitch expected aggregate net borrowing to increase only marginally on last year and medium and long term (MLT) redemptions will be lower. However, the stock of ST debt to be rolled over has dramatically increased, leading to a slightly higher overall borrowing requirement in 2010 than in 2009.
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