European Problems Have Not Been Resolved

BOND STATEGIST: Morningstar's Dave Sekera explains why investors are becoming too complacent about risks in Europe

Dave Sekera, CFA 19 March, 2013 | 10:58AM
Facebook Twitter LinkedIn

European Sovereign Credit and Banking Fears Fading, But Risks Remain

The yield on Spanish 10-year bonds rose 16 basis points last week to 4.92%, but are still 30 basis points lower than last month and near their lowest since late 2010. The yield on Italian 10-year bonds held steady at 4.60%, near the middle of its six-month trading range.

We think the continuing growth in non-performing loans in Spain and Italy will most likely lead the markets to further question the stability of many European banks

While the markets appear relatively sanguine regarding Europe's sovereign risks, we have long held a sceptical view that Europe's structural problems have been resolved. The rating agencies also appear to be increasingly nervous about the direction of credit risk among European nations. For example, Fitch recently cut its credit rating on Italy one notch to BBB+ and Moody's downgraded the United Kingdom to Aa1 from Aaa. Fitch specifically pointed to the adverse impact on the headline budget deficit due to Italy's deep, ongoing recession. While these downgrades are not significant events in and of themselves, they may indicate that the agencies are re-evaluating their credit ratings across the eurozone. The greater risk is if this foreshadows further rating changes in other European sovereign credit ratings. Also, as we've seen before, once one of the rating agencies makes its move, it provides cover for the others to follow.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Intesa Sanpaolo2.33 EUR-0.66Rating

About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

Audience Confirmation

By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies       Modern Slavery Statement