Italy, Greece have buffers from rising rates -S&P Global analyst

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LONDON — Italy and Greece continue to have “buffers” in place to protect them from rising borrowing costs and there is a reasonable chance that Greece’s credit rating could be upgraded soon, one of S&P Global’s top analysts told Reuters on Monday.

European bond yields have risen sharply since the European Central Bank on Thursday finally acknowledged mounting inflation risks and crack evened the door open https://www.reuters.com/business/ecb-seen-hold-may-acknowledge-inflation-risks- 2022-02-02 to an interest rate increase this year.

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Factors such as the low cost of refinancing its debt means that Italy – one of the world’s most highly indebted economies – continues to have a buffer from rising borrowing costs, said S&P’s top European sovereign analyst Frank Gill.

“We still think there’s some buffer there, but obviously if you see yields back up over 100 basis points over the next few months, considerably more, than it does start to feed in gradually,” he said.

“But again, since (quantitative easing) was introduced in 2015, Italy, like other euro zone governments, have used very benign financing conditions to term out their debt.”

The average maturity of Italian debt is around seven years and the cost of funding new debt last year was just 0.1%.

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Gill said Greece, which has a strong cash position and has also lengthened its debt maturity profile in recent years, has “substantial buffers” in place as sovereign borrowing costs rise. It is still the European country with the highest debt burden relative to the size of its economy.

Greece’s 10-year bond yield on Monday jumped more than 25 basis points to 2.37%, its highest since April 2020.

Its debt has sold off particularly sharply as its speculative grade rating means Greek bonds are only eligible for the ECB’s pandemic emergency bond purchases, which end in March, not the older Asset Purchase Programme.

S&P raised Greece’s rating by a notch to ‘BB’ in April 2021, two notches below investment grade. Greece has a positive outlook, meaning a further ratings move is possible with a 12-month period.

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“So I think there’s certainly quite a reasonable probability of an upgrade by the end of April 2022,” said Gill.

He said Portugal’s recent election outcome boded well for the country’s policy outlook and that S&P expected Portugal to achieve a balanced budget by 2024.

A snap election last month delivered a surprise majority to Portugal’s Socialist Prime Minister Antonio Costa, praised by investors for balancing budget discipline with economic growth.

Also speaking to Reuters, S&P Global’s senior European economist Marion Amiot said it would take time for wages, long seen as the missing part of euro area inflation puzzle, to rise.

“Probably towards the end of the year, we will see some dynamism in earnings growth, but it’s not there yet,” she said.

(Reporting by Dhara Ranasinghe; Editing by Catherine Evans)