Government bond markets in the eurozone have rallied since the depths of the sovereign debt crisis in 2011 and 2012. Yields have declined ever since European Central Bank President Mario Draghi said the bank will do “whatever it takes to preserve the euro” on July 26, 2012. Since early this year, sovereign issuers on the so-called periphery have been able to borrow at or close to all-time lows. In this article we define the countries on the periphery as Italy, Spain,Portugal, Ireland, Greece, and Slovenia. Even Greece, which defaulted twice in recent years, has been able to tap the capital markets again to a limited extent, a far cry from 2010 to 2012, when it and other sovereigns in the European Economic and Monetary Union (EMU or eurozone) had lost access.
Although market sentiment has improved, Standard & Poor’s Ratings Services’ ratings on eurozone sovereigns haven’t risen commensurately. Indeed, since the market recovery, we have raised the ratings by one notch only on Spain andLatvia in May 2014, and then on Ireland in June (other than Greece and Cyprus following their respective emergence from default). Overall, the sovereign ratings remain well below pre-crisis levels. We currently have only one positive outlook (on the ‘A-‘ rating on Ireland) and two negative ones (on the ‘BBB’ rating on Italy and the ‘AAA’ rating on Finland). The remaining 15 outlooks on the sovereigns are stable. These outlooks together indicate that we don’t anticipate many rating actions on eurozone sovereigns within the next year or two. Our ratings, therefore, reflect a cautious view about the credit outlook, which in turn is based on our view that growth will remain subdued because deleveraging across much of the region will continue for several years (see “The Long Haul: Eurozone Deleveraging Could Stunt Growth For Years,” published on June 10, 2014, on RatingsDirect).