Credit rating firms say they could further downgrade the ratings of highly indebted eurozone countries, putting their bonds at risk of being pitched out of global indexes and reversing a fall in their borrowing costs.
The view from the rating firms contrasts with the sanguine attitude of investors who, flush with central bank cash and reassured by the European Central Bank’s promise to take whatever measures are necessary to safeguard the common currency, have been buying lower-rated bonds because of the higher returns or ‘yields’ they earn on them.
On the face of it, conditions for sovereign borrowers in the eurozone are improving. Ireland and Portugal – whose bonds are already rated as ‘junk’, or below investment grade – are gradually emerging from international bailout programmes and returning to bond markets for their borrowing needs, while yields on benchmark bonds issued by Spain and Italy, two other countries that have felt the heat of the crisis, have fallen to around two-and-a-half year lows after hitting unsustainable peaks above 7 per cent.
Analysts say the recent market moves have been because plentiful liquidity provided by the ECB and other major central banks has outweighed unfavourable fundamental factors such as the fact that most eurozone economies continue to contract.