Despite ECB bond purchases
Analysts see possibility of new euro crisis
May 6, 2022, 2:44 p.m
Analysts at Deutsche Bank refute widespread assessments of the sustainability of public finances in various EU countries: Contrary to public perception, the debt of many countries has not decreased since 2011. Under one condition, this could become a problem.
Deutsche Bank analysts Maximilian Uleer and Carolin Raab do not rule out a new euro crisis despite the European Central Bank’s (ECB) government bond purchases. Although the interest costs of all euro countries have fallen in relation to economic output and the average remaining term of their debt has increased, on the other hand the debt of some countries has increased further since 2011, which would pose the same problems as in 2011 in the event of a significant increase in bond yields , the analysts write in a comment. “The ECB’s degrees of freedom are limited,” they say.
In their study, Uleer and Raab deal with several common judgments about the sustainability of public finances in some euro countries, some of which, according to them, are not correct. Your statements refer to Spain, France, Italy, Portugal, Ireland, Germany and Greece.
The euro countries have reduced their debt since 2011
According to her, this is not correct, strictly speaking it only applies to Ireland and Germany. In most countries, debt has grown faster than nominal gross domestic product (GDP). Spain’s debt ratio increased slightly by 70 percent by 2021, France’s by 29 percent and Italy’s by 26 percent. On the other hand, Germany was able to reduce its debt by 13 percent and Ireland – thanks to rapid economic growth – by 49 percent.
The weighted average nominal interest rate on government bonds is lower than it was ten years ago
According to the authors, this is true for all countries: in Italy it fell to 2.4 (2011: 4.2) percent, in Spain to 2.2 (4.3) percent, France to 1.6 (3.6) percent and in Germany to 1.1 (3.3) percent.
We are a long way from the return levels seen in 2011
According to the authors, this is not true. In their view, the most telling measure of this is the ratio of interest costs to GDP. Countries with higher debt may have interest costs as high as in 2011 despite lower yields. Spain has already come particularly close to this “critical coupon”. The difference between it and the current interest rate is only 0.3 percentage points, and in Italy it is 0.9 percentage points. In France and Portugal it is 1.2 and in Germany 2.7 percentage points.
The average remaining maturity is much higher than in 2011
That’s right, it lengthened to about 28 (9) years in the case of Greece, for example, and 8 (7) in the case of France. However, the average remaining terms of German (6 years) and Italian (7 years) bonds remained unchanged. The authors also point out that Italy’s maturity profile is concentrated at the shorter end. 35 percent of government bonds would mature by the end of 2024.
According to Uleer and Raab, what is good about the development over the past ten years is that the federal states have been able to reduce their interest costs as a percentage of GDP and extend the terms of their bonds. The bad thing, however, is that debt has continued to rise, especially in countries that are already highly indebted. “These countries will have similar interest cost-to-GDP ratios, at lower yield levels than in 2011,” they write.
For example, if the yield on 10-year Italian bonds increased by 2 percentage points next year, analysts say that by the end of 2025 Italy would have the same interest burden as a percentage of GDP as it did in 2011. “In summary, the debt burden has fallen and the ECB has leeway to hike rates and end its purchase program,” they write. But the ECB’s degrees of freedom are limited. “If interest rates rise sharply for a longer period of time, we could well be facing a euro crisis 2.0.”