When Eastern Europe was experiencing a spot of difficulty back in the winter of 2009, we saw the crisis spillover into neighbouring of Austria.
Now that the spotlight is once again shining on the region, with Latvia’s currency tribulations under particular scrutiny, worries over Austrian finances are once again coming to the fore. Here for instance, is a Reuters article which speculates that Austria, along with the UK, may be next on the S&P downgrade list:
LONDON, June 8 (Reuters) – Britain and Austria could be the European countries whose sovereign credit ratings are most likely to be cut next after Standard & Poor’s lowered Ireland’s rating on Monday for the second time in only three months.
Of those two, Britain is the only one with its sovereign credit rating on “negative” watch, suggesting if S&P is to cut another sovereign it’s the UK triple-A rating that could go. The sheer scale of UK government borrowing and projected deficits over coming years, coupled with the banking sector’s growing liabilities, mean a downgrade could be on the cards if policy steps fail to impress the ratings agencies.
Austria still has its triple-A rating and is on “stable” outlook. But that could change if financial and economic turmoil in the Baltics and Eastern Europe, to which Austrian banks have large exposure, deepens.
In fact, according to investment banks like Deutsche Bank, Austria, followed by Greece, is the most exposed of Eurozone nations to the difficulties in Central and Eastern Europe. At left is Deutsche’s Eastern Europe/Central Europe vulnerability chart which takes into account Euro-area countries’ exposure to the region on a banking system and trade channel basis.
As per that Reuters story, Austrian/German 10-year government bond yield spreads accordingly widened last week by around 20 bps to a month-high of circa 81 bps, as investors dumped Austrian bonds on the back of Latvian troubles. This should have been a problem for the Alpine country, which, unlike Greece still has the bulk of its debt of issuance ahead of it — particularly of long-dated bonds.
Here, for instance, is Deutsche on the widening spreads and the issuance calendar:
Austria and Greece are at the extremes of the issuance spectrum of the euro-area countries. Greece has more or less completed its issuance for the year. Austria, on the other hand has been the slowest, having completed less than 50% of its expected issuance for the year. This supply dynamic could explain the limited spread widening for Greece and would suggest that Austrian spreads could widen further. As investors’ concerns about expected supply from euro-area countries grow and appetite for government debt declines, Austrian yields might have to move higher to attract investors.
In fact, Austria is due to sell €935m of July 2015 government bonds and €1.1bn of 2019 bonds on Tuesday (today).
The results of the 2019 bond auction have just been published. With a bid to cover ratio of 1.66 on the 2019 and 2.37 on the 2015, and yields at price of 4.29 and 3.848 per cent respectively, the results suggest that despite the concerns outlined above, investor appetite for new Oesterreichische debt isn’t yet waning.
Related links:
Domino theory, Eastern Europe edition – FT Alphaville
Waiting for Latvia to devalue – FT Alphaville