Despite the ECB’s bond purchases: analysts see the possibility of a new euro crisis

Despite the ECB’s bond purchases
Analysts see the possibility of a new euro crisis

Deutsche Bank analysts refute widespread assessments of the sustainability of public finances in various EU countries: contrary to public perception, many countries’ debt has not decreased since 2011. On one condition, this could become a problem.

Deutsche Bank analysts Maximilian Uleer and Carolin Raab are not ruling out a new euro crisis despite the European Central Bank’s (ECB) government bond purchases. Although the interest costs of all euro countries have decreased in relation to economic output and the average residual maturity of their debt has increased, on the other hand, the debt of some countries has further increased since 2011, which would pose the same Problems of 2011 in the event of a significant rise in bond yields, analysts write in a comment. “The degrees of freedom of the ECB are limited,” they say.

In their study, Uleer and Raab address several common judgments about the sustainability of public finances in some euro countries, some of which, according to them, are incorrect. His statements refer to Spain, France, Italy, Portugal, Ireland, Germany and Greece.

Euro countries have been reducing their debt since 2011

According to her, this is incorrect, 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-to-GDP ratio increased slightly by 70% by 2021, that of France by 29% and that of Italy by 26%. On the other hand, Germany managed 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

10-year Italian government bonds
10-year Italian government bonds 97.81

According to the authors, this is true for all countries: in Italy it fell to 2.4 (2011: 4.2) per cent, in Spain to 2.2 (4.3) per cent, in France to 1, 6 (3.6) per cent and in Germany 1.1 (3.3) per cent.

We are a long way from the performance levels seen in 2011

According to the authors, this is not true. In their view, the most significant measure of this is the relationship between interest costs and GDP. Countries with higher debt may have high interest costs as in 2011 despite lower yields. Spain has already gotten particularly close to this “good critic”. 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 residual duration is much higher than that of 2011

That’s right, it stretched to around 28 (9) years in the case of Greece, for example, and 8 (7) in the case of France. However, the average residual maturities of German (6-year) and Italian (7-year) bonds remained unchanged. The authors also underline that Italy’s maturity profile is concentrated in the shorter range. 35 percent of government bonds will expire by the end of 2024.

According to Uleer and Raab, the positive aspect of the development of the past decade is that federal states have been able to reduce interest costs as a percentage of GDP and have been able to extend the maturities of the bonds. The bad thing, however, is that debt has continued to grow, especially in already heavily indebted countries. “These countries will have similar interest cost-to-GDP ratios, at lower return levels than in 2011,” they write.

For example, if the yield on Italian 10-year bonds increased by 2 percentage points next year, analysts say that by the end of 2025 Italy would have the same interest load as a percentage of GDP in 2011. “In summary , the debt burden has decreased and the ECB has the leeway to raise rates and end its buying program, “they write. But the ECB’s degrees of freedom are limited. “If interest rates rise dramatically over a longer period of time, we could very well be facing a Euro 2.0 crisis.”

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