Fitch Ratings said rising government bond yields are putting public financing under strain for European sovereign borrowers. In a European sovereign debt market overview presented in London on Wednesday, the agency said the current situation differs fundamentally from the euro area debt crisis of 2010. Fitch had earlier revised France’s outlook from stable to negative. The 10-year OAT yield had risen to 4.9 percent by end-October, after a 141 basis point increase over the year.
Yield rises across the region
The increase was not confined to France. Over the same year to end-October, the 10-year Belgian government bond yield rose 103 basis points, the Italian yield 98 basis points and the UK gilt yield 82 basis points. The French spread over the German Bund briefly peaked at 174 basis points.
Fitch said investors may penalise governments they see as making insufficient progress on fiscal sustainability. Such penalties could arrive as sudden, large yield rises capable of destabilising the wider economy. The agency noted that the average maturity of debt offers some protection, but debt service costs keep climbing.
Debt burden and interest costs
Fitch expects France’s general government debt to reach 119 percent of GDP by end-2026, and Italy’s 138 percent. Each one percentage point rise in yields would add 0.2 percent of GDP to interest costs in France and Italy in the first year, and 0.3 percent in the second year.
For Hungary, the same rise would add 0.1 percent of GDP in the first year and 0.2 percent in the second.
How this differs from 2010
Fitch listed several differences from the early 2010s. It sees no sign of overheating in the most vulnerable markets, points to precautionary safeguards in banking sectors, and cites better EU-level tools for systemic stress.
Related: Fitch cuts France's outlook to negative on fiscal slippage · HR Ratings cuts Mexico's sovereign rating to BBB, outlook stable
Source: Fitch Ratings
