Brussels (Brussels Morning) Portugal and Spain could save some 17 billion euros between them on their refinancing debt servicing costs by 2023, Reuters reported today, Thursday.
S&P Global Ratings analysts note that 10-year bond yields in the two EU member states stand at approximately 0% due to the European Central Bank (ECB)’s coronavirus stimulus and bond purchases in particular. Yields have dropped about 40 basis points in both Portugal and Spain since the start of the year, in contrast with the steep growth of borrowing costs experienced in the 2010-2012 debt crisis, when the two countries were forced to accept bailouts.
According to Germany’s DZ Bank, the ECB is set to buy all new Spanish debt in the remainder of the year and more than 80% of Portugal’s.
Frank Gill, Senior Director in S&P’s European Sovereign Ratings Group, calculates that a 100 basis-point drop in yield lowers Portugal and Spain’s debt servicing costs approximately 0.1% of GDP the first year and about 0.25% the following year.
Spain, he anticipates, will save around 0.4% of GDP — some 5 billion euro — through refinancing this year, and more than 16 billion euro by 2023.
Portugal will save approximately 0.2% of GDP or some 380 million euro this year, Gill predicts, and about 840 million by 2023. This is why bond investors remain optimistic despite the steady growth of debt to GDP ratios which are expected to reach record-highs above 120% this year. Gill stresses that the ECB is monetising this spree as commercial markets are not absorbing the debt, and points out that de facto cost of the debt is zero.
Arnaud-Guilhem Lamy, bond management specialist at BNP Paribas Asset Management, notes that both countries pay positive real yields after adjusting for inflation, adding that this is rare for developed economies. He predicts yield on Portuguese and Spanish bonds can drop further, to about 25 base points above comparable French yields.
Currently, yield on Portuguese 10-year bonds is about 60 base points above German yields, with a spread of approximately 90 base points for 30-year bonds. The situation in Spain is similar. The premium on Portuguese and Spanish 10-year bonds over German yields is near the lowest point in over a decade.