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

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Intesa Sanpaolo1.56 EUR0.26

About Author

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

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