Analysts estimate it will force the region’s governments to sell more new debt in the bond market next year – upwards of 500 billion euros (US$525bil or RM2.32 trillion) on a net basis – than anytime this century.
LONDON: As winter approaches, governments across Europe have been frantically drafting aid programmes to protect their citizens from the surge in energy costs triggered by Vladimir Putin’s invasion of Ukraine.
There are electricity price caps in France, gasoline discounts in Italy and heating-bill subsidies in Germany.
These measures are costing a lot of money, notching up a tab in the hundreds of billions of euros, and swelling the region’s financing needs well above historical norms for a fourth straight year.
The problem with it all is that unlike the past eight years, when the European Central Bank (ECB) was happy to print money and buy as many bonds as needed, governments will have to find new financiers.
So rapid, in fact, will the ECB’s policy pivot be that analysts estimate it will force the region’s governments to sell more new debt in the bond market next year – upwards of 500 billion euros (US$525bil or RM2.32 trillion) on a net basis – than anytime this century.
And bond investors, scarred by the same inflation surge that the ECB is trying to squelch, aren’t in the mood to tolerate fiscal largesse right now. As Liz Truss found out, they will exact a price.
Not even regional powerhouses like Germany and France will be spared from a jump in borrowing costs, strategists said. BNP Paribas SA sees benchmark German bond yields soaring nearly one percentage point by the end of the first quarter.
And for Italy, the most financially vulnerable of the European Union’s big economies, the stakes are much higher still.
Citigroup analysts estimate that by early next year, it will take a yield premium of almost 2.75 percentage points over benchmark bunds to entice investors to buy Italian bonds.
That’s a level that would trigger alarm bells in Brussels and reignite the nervous speculation that has waxed and waned over the years about the country’s long-term ability to meet debt payments.
“If you move into an environment where European governments issue more debt to face the energy crisis and on top of that you get quantitative tightening, the cost of borrowing will increase massively,” said Flavio Carpenzano, an investment director at Capital Group in London.
“Markets will start to call into question the sustainability of debt in countries like Italy.”
Barclays Bank Plc sees European government bond net issuance rising to nearly 500 billion euros in 2023, a record high.
That figure accounts for additional funding needs should the economic downturn prove more severe and also takes into account other sources of funding outside the bond markets.
The net amount could climb a further 100 billion euros (RM463bil) if the ECB starts curbing its reinvestments, so-called quantitative tightening.
In Germany, the epicentre of the region’s energy crisis due to its reliance on Russia, measures include help with heating bills, grants and a brake on gas prices. France has implemented gas and electricity price caps.
S&P Global Ratings recently switched its outlook for the nation to negative from stable, pointing to “highly accommodative” fiscal policy.
Italy’s net cash requirement – which factors in gross supply, redemptions, free float coupons and central bank flows – is set to increase by 48 billion euros (RM222bil), the biggest amount as a percentage of gross domestic product after Portugal, according to Citigroup’s estimations.
“Even if Italy toes the European line, it will be issuing a lot,” said Ario Emami Nejad, a fund manager at Fidelity International. — Bloomberg
