Moody's: Fragile economic growth and low spreads limit positive effect of ECB stimulus on corporate bond market

While the ECB corporate security purchase programme (CSPP) will have a positive impact on the European corporate bond market, its effects will be limited, says Moody's Investors Service in a report published today. 

Moody's report, entitled "Non-financial corporates - Europe: Bond Market To Benefit From ECB's Bond Purchase Programme, Albeit Marginally And With Some Risks," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action. 

"It will take time for the ECB's bond-purchasing programme to improve issuer confidence and corporate investment appetite in Europe, as economic growth will likely remain subdued. Also, investment-grade companies have strengthened their balance sheets in recent years and cost of debt is already low. They currently have little appetite to issue more debt," says Paolo Leschiutta, a VP-Senior Credit Officer at Moody's. 

"We believe that structural reforms in European countries could help improve the effectiveness of the programme. The time it will take to implement reforms might delay the positive impact of these initiatives on economic growth." 

The CSPP will sustain corporate access to the capital market by reducing spreads and keeping demand high, reducing refinancing risks and improving issuers' liquidity. Intervention to sustain the bond market also reduces European corporates' reliance on the banking system which, at least in certain countries, remains structurally vulnerable. 

Overall, the rating agency expects high-yield issuers to benefit most from investors' increased appetite for riskier assets, as the ECB's bond purchasing programme will further reduce what are already low investment-grade spreads. 

However, Moody's notes that financial market efficiency could be at risk in the event of a prolonged CSPP. Unintended consequences of the CSPP could include a reduction in the efficiency of financial markets and a further reduction in secondary market liquidity. Lower speculative-grade spreads would probably be negative for smaller and more highly leveraged companies such as companies rated single-B and below, or less frequent issuers because these might become less attractive for investors as returns would not adequately reflect the level of risk. 

Lower spreads and potential negative yields might also add to pressure on banks' profitability, which is already low.