March 30, 2020/Fitch Ratings
The following comment, originally published on 20 March 2020, misstated Greece’s sovereign rating in the seventh paragraph. This has been corrected and all other text is unchanged.
The ECB’s EUR750 billion bond-buying reduces refinancing risk for eurozone sovereigns and will help facilitate their fiscal responses to the coronavirus crisis, Fitch Ratings says. In line with our global approach, we will aim to assess how far urgent fiscal measures could lead to medium-term deteriorations in public finances when incorporating crisis responses into our sovereign credit analysis.
The ECB will buy public- and private-sector securities until at least end-2020 under its Pandemic Emergency Purchase Programme (PEPP). Eligibility requirements for Greek government debt under the existing purchase programme are waived, and purchase flows can vary across asset classes and jurisdictions, if necessary.
The size and flexibility of the PEPP eases potential refinancing risks for eurozone sovereigns most affected by the coronavirus (Italian and Spanish sovereign bonds rallied after the announcement). It also means the ECB will help to absorb bonds that will be issued to finance fiscal easing in response to the sharp economic contraction caused by coronavirus-containment measures.
Fitch’s 2020 base case eurozone GDP forecast of -0.4% assumes a V-shaped recession and recovery, but the evolving nature of the crisis creates substantial downside risks. A number of governments, including those of the bloc’s four largest economies, have announced fiscal responses, including a mix of tax cuts, new spending and loans or guarantees. Moreover, tax revenues will fall and other demands on government spending will increase while containment measures are in place.
On top of individual countries’ supplementary fiscal measures and automatic stabilisers, the Eurogroup announced European-level measures including a EUR37 billion ‘Coronavirus Response Investment Initiative’ and EIB Group lending and investment. Both national and European fiscal responses are developing and growing. According to the Eurogroup’s 16 March statement, the combined direct fiscal measures at the national and European levels account for 1% of GDP on average. The combined liquidity measures that include sizeable loan guarantees from fiscal authorities, which we think are an important component of an effective near-term policy response, account for about 10% of GDP.
The eurozone’s lack of central automatic fiscal stabilisers means that, in the absence of greater risk-sharing (potentially via the ESM or the creation of common Eurobonds), the fiscal response will primarily fall to individual member countries, whose headroom to absorb major fiscal loosening varies significantly. The European Commission is facilitating this by allowing member states full flexibility around the Stability and Growth Pact and State Aid frameworks.
Fiscal performance has varied since the eurozone sovereign debt crisis. For example, Austria (AA+), Malta (A+), Portugal (BBB), Cyprus (BBB-) and Greece (BB) all demonstrate a record of running sizeable general government primary surpluses (in some cases as part of EU/IMF programmes). This has helped to put debt on a firm downward path (as reflected in the Positive Outlooks on their sovereign ratings).
Timely and targeted policies can help to reduce the risk of a more sustained loss of economic output. However, there is scope for some sovereign ratings migration given the importance of public finances to sovereign credit profiles. The magnitude and duration of the impact on the public finances will reflect the severity of the economic downturn (which may be larger for some countries, such as those where tourism is a significant contributor to GDP and revenues) and the effectiveness of the policy responses. As supplementary fiscal measures are adopted and enacted, our judgements on whether ratings should change will be guided in part by individual sovereigns’ records of fiscal consolidation during more favourable economic times.
The likelihood that temporary stimulus measures are unwound will also reflect policy choices and political developments that result from the crisis. The need to formulate a crisis response can strengthen national political cohesion in the short term. In Spain, for example, the main opposition party Partido Popular has pledged to support the Socialist government’s crisis response, while most Belgian political parties have agreed to grant the current caretaker government a six-month term with special powers. However, over the medium term, the crisis may make politics even less conducive to fiscal consolidation, for example by increasing expectations of state support for troubled companies.