Eurozone could risk 'sovereign debt explosion'
Europe's governments are at increasing risk of an interest rate shock this year as the lingering effects of the Great Recession drive debt issuance to record levels and saturate bond markets, according to Standard & Poor's.
Italy has to refinance 20pc of its entire debt, tapping the bond markets for a total ?259bn this year
"Debt-related sovereign vulnerabilities have increased, particularly in the Eurozone, where we expect government borrowing will rise to further new peaks," said Kai Stukenbrock, the ratings agency's European credit analyst. "The resulting fiscal pressure from a sustained increase in financing cost could be significant in our view."
The warning comes as bond giant PIMCO spoke of a "sovereign debt explosion" that has taken the world into uncharted waters and poses a major threat to economic stability. "Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood," said Mohamed El-Erian, the group's chief executive.
Mr El-Erian said most analysts are still using "backward-looking models" that fail to grasp the full magnitude of what has taken place in world affairs since the crisis. Some 40pc of the global economy is in countries where governments are running deficits above 10pc of GDP, with no easy way out.
Standard & Poor's said Europe's states need to raise €1,446bn (£1,313bn) this year as the full damage inflicted by the credit collapse – masked last year by emergency stimulus measures – becomes ever clearer. This will become harder to fund cheaply as central banks start to tighten. "We believe that benchmark yields have benefited from liquidity injections into the financial sector and quantitative easing measures by the Bank of England and the Federal Reserve. As that support could eventually be withdrawn from 2010, excess supply in government bond markets could start driving benchmark yields back up. Such a development could add to fiscal pressure in a number of sovereigns with high deficits," it said.
Several states have come to rely on cheap short-term funding, storing up "roll-over risk" that will come to a head in coming months. Italy has to refinance 20pc of its entire debt – the world's third largest after Japan and the US – tapping the bond markets for a total €259bn this year. Belgium has to roll over 22pc of its substantial debt.
"This implies dependence on more or less constant access to financial markets," said the report.
Weaker states risk a double effect of rising yields on benchmark bonds as well as higher spreads as investors demand a greater risk premium in the harsher climate now facing heavily-indebted countries.
Greece has already seen a surge of 300 basis points in its long-term funding costs since the new Pasok government of George Papandreou revealed that the country's true budget deficit was 12.7pc, double the previous estimate.
The agency estimates that a sustained rise in yields of 300 basis points would raise the burden of interest costs each year by 3.9pc of GDP for Greece, 2.6pc for Portugal, and 2.5pc for Italy and Britain by the middle of the decade.
A jump of this kind would amount to an extra £35bn or so in annual interest costs, roughly equal to the UK defence budget. This would play havoc with UK public finances and force the Government to squeeze fiscal policy even further. S&P's warning clearly underscores the risk of waiting too long before restoring the deficit to a sustainable path.
The report said there had been a notable increase in "alternative channels of borrowing" that "embellish" the true debt picture. France's Société de Financement de l'Economie (SFEF) has issued €77bn of state-backed bonds since 2008 and the Caisse d'Amortissement de la Dette Sociale has amassed liabilities of €103bn. Austria's infrastructure financing companies, used to buttress state stimulus programmes, have €23bn in debts.
This hidden iceberg of debt kept off balance sheet is likely to be the next focus of bond vigilantes.
http://www.telegraph.co.uk/finance/economics/7424555/Eurozone-could-risk-sovereign-debt-explosion.html
http://www.telegraph.co.uk/finance/economics/7424555/Eurozone-could-risk-sovereign-debt-explosion.html
No comments:
Post a Comment