It is a question worth more than €550 billion: Who is going to buy European states’ debt? This year, European governments are facing a painful financial pinch. On the one hand, their spending is spiraling out of control: The shock of inflation is pushing them to offer social aid and implement measures to limit the rise in energy prices; the war in Ukraine requires increased military spending; and massive investments are required to deal with global warming. On the other hand, the European Central Bank (ECB), which has long been the big buyer of debt, is pulling out of the market.
There is a lot of public spending, but one less key player in the bond market: The equation is going to be complex for the markets. According to Deutsche Bank analysts’ calculations, by 2023, private investors willing to inject €555 billion to finance the 10 largest countries in the euro zone will have to be found. That is three times more than in 2022.
This works out to 453 billion in bonds issued by these 10 countries, while the ECB must reduce its bond portfolio by €102 billion at the same time. Germany and France are the two most affected countries, with respective financing needs of €155 billion and €138 billion this year. For France, this is more than double compared to 2022, and for Germany, a multiplication by 13.
‘Whatever the cost’ is starting to cost a lot
No false suspense: European countries are not about to run out of financing. “Pimco, BlackRock [two large investment funds] and other large institutional investors are ready to buy European debt,” said Eric Dor, director of economic studies at Iéseg business school. “The demand is there, especially in the big countries, where the markets are very liquid.” On the other hand , this enormous need for financing comes at a cost: Investors are there, provided that the interest rates they are offered are sufficiently attractive.
A member of the ECB’s Executive Board, speaking on condition of anonymity, confirmed this analysis: “There is strong demand for European government bonds. With interest rates having gone up a lot, investors are happy to participate. But the cost has gone up. “
Friday, April 21, was a reminder of the issue of state financing. Eurostat, the European statistics agency, published the level of deficits of European Union countries for 2022. For the entire euro zone, this reached 3.6% of gross domestic product (GDP). Admittedly, this is a clear improvement over the pandemic years (7.1% in 2020, 5.3% in 2021), but then you have to go back to the euro zone crisis in 2012 to find such a large deficit. As always, some countries are particularly exposed, starting with Italy, whose deficit was 8% of GDP last year. Malta (5.8%), Spain (4.8%) and France (4.7%) have the next three worst results.
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