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At the end of July when sovereign yields of the troubled euro area economies were reaching a peak, we highlighted in a chart of the week the Emergency on funding costs for sovereigns, financial and non-financial corporations. The piece emphasized that:

·         Funding cost for financial and non-financial corporations are highly correlated with sovereign risk and have reached very high levels leading to a real fragmentation of the euro area

·         Top financial corporations were borrowing at higher rates than sovereigns and non-financial corporates

·         In Spain the market pressure over the sovereign risk was so high that the top 5 Spanish non-financial corporations were borrowing at lower interest rates than their sovereign, hinting at some decoupling of sovereign from private sector risk

Since Draghi’s announcements about doing “whatever it takes to preserve the euro” (see: The bond market consequences of Mr Draghi), risk measures have come down substantially. Non-financial corporate in Spain and Italy now pay a risk premium of around 300 basis points for 5 year CDSs. This compares to a risk premium of 100 basis points for German corporates.

Interestingly, the normal ordering has been re-established with the sovereign risk being the lower bench mark. In particular, Spanish corporates now pay higher risk premiums than their respective governments. Similarly, in France the non-financial corporates now pay higher premiums than the government.

These results suggest that a normalization of financing costs has been established in the euro area thanks to the ECB’s pledge. It is clear, however, that funding costs remain high for peripheral corporate bonds.

As in the previous blog entry, we plot the CDS risk premia on 5 year sovereign bonds along the CDS premia for the financial and non-financial corporate bonds of the five largest corporations in Spain, Italy, Germany and France[1]. We build an unweighted average across the largest five financial and the five non-financial corporations. The corporations included are listed in the table below.

[1] For financial corporations, the sample includes the top five financial institutions ranked according to its value of total assets at the end of 2012. Non-financial corporations have been selected according to the Financial Times' Global 500 list, where ranking is based on prices and market values from 30 March 2012.  If data from one of the top-five ranked institutions was not available (financial and non-financial), the next highest ranked institution with data was considered.