Investors are once again beginning to worry about high levels of government debt in the eurozone, as the prospect of rising interest rates revives fears that have largely remained dormant in recent years.
Borrowing from debt-laden countries, including Italy, Greece and Spain, has risen in the decade since the region’s sovereign debt crisis, in part due to a drain on public finances from the coronavirus pandemic.
Markets were more inclined to finance these large piles of debt, while borrowing costs were extremely low and the European Central Bank continued its large-scale bond-buying program. But the ECB’s plans to withdraw such incentives – with a halt to asset purchases and a planned fourth-quarter increase in July – mean that the bonds of these southern European countries are under pressure again.
Borrowing costs for Italy and Greece have risen sharply, with Italy’s 10-year yield reaching its highest level since 2014 on Friday – although it remains well below the scales scaled in 2012. However, many investors are worried that a sustained rise could raise concerns about how manageable the debts of Rome or Athens are.
“I think the situation is worrying, but it is not critical,” said Antoine Bouvet, senior interest rate strategist at ING. “Sometimes markets can get angry and lose confidence,” he said, adding that this was becoming a “self-fulfilling prophecy”.
He said that if the difference between the Italian and the standard German yield reaches 2.5%, then “some alarms will start beating in the ECB.” The spread rose to about 2.25% on Friday.
“So far [the widening] is relatively tidy, but can put the ECB to sleep in a false sense of security, “added Bouvet.
In a political statement this week, the ECB said it planned to raise interest rates by 0.25 percentage points in July and that “if the medium-term inflation outlook is maintained or worsened, a larger increase would be appropriate at the September meeting”.
The last time the bank raised interest rates was in 2011, and interest rates on its deposits are currently minus 0.5 percent.
Regarding fears of fragmentation – the idea that tightening monetary conditions could affect eurozone countries differently – ECB President Christine Lagarde said on Thursday that if necessary, “we will deploy either existing adjusted instruments or new instruments that will be provided. “
“Obviously, we need to make sure that there is no fragmentation that prevents the proper transmission of monetary policy,” she added.
Additional reports by Tommy Stubington
Add Comment