Euro Crisis 2.0? Debt burdens could return to 2011 levels if rates rise much further, Deutsche Bank strategist warns


A decade ago, the Greek debt crisis dominated the financial news.

As the European Central Bank prepares to launch a rate hike campaign – an official now says the take-off could come in June – and while the yields on Italian TMBMKIT-10Y bonds,
3.082%
are now 2 percentage points higher than the yields on German TMBMKDE-10Y bonds,
1,086%,
Deutsche Bank strategist Maximilian Uleer decided to compare where the eurozone was a decade ago.

Relative and absolute levels have risen since 2011. Even with debt relief, Greece’s debt-to-GDP ratio is lower because its economy has shrunk. Only Germany and Ireland, where companies have relocated to take advantage of tax cuts, have seen their debt-to-GDP ratios fall.

Of course, interest rates are lower. The weighted average coupon has dropped significantly and the maturity of the debt is longer.

Uleer said that Spain and Italy are in the greatest danger of seeing their interest costs in relation to GDP approach 2011 levels.

“The debt burden has dropped and the ECB has room to raise rates and stop its buying program. But the ECB’s degrees of freedom are limited. If rates rise sharply for longer, we could be facing a crisis. Euro 2.0, “Uleer said.

François Villeroy de Galhau, governor of the Bank of France and a member of the governing board of the European Central Bank, said on Friday that it would be “reasonable” to have interest rates in positive territory later this year, which would require increases in three-quarters of a point. .

The EURUSD euro,
+ 0.17%
on Friday, but fell 7% against the dollar this year.



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