The debt fever of Italy and the ‘cough’ of Greece

By Tasos Dasopoulos

“Greece may have its -proportionally- largest debt in the single currency bloc today, but the whole Eurozone is holding its breath for Italy, which in the current context of high inflation and the environment of rising interest rates, is fast approaching” red belt “.

The third largest economy in the Eurozone will have to refinance a total debt of 2.7 trillion this year. euros, with an amount of about 1 trillion. which will be raised from the markets. At the same time, the yield on the Italian 10-year bond before the interest rate hike started has jumped to 3.83% from 3.1% a week earlier, while its banks are overloaded with government bonds. Therefore, if yields continue to rise at the same rates, Italy will face not only a debt crisis but also a banking crisis. Our neighboring country has an investment grade and is also a member of the group of 7 strongest industrialized countries (G7).

The differences of Greece

In parallel, Greece also saw its bond yields increase. The yield in Greek 10 years has reached 4.4% from 3.75% a week ago. Greece has announced an annual loan program of no more than 12 billion euros, of which it has covered about 4.5 billion and has 39 billion euros available, which can cover its financing needs for about 3 years. Of its 355 billion euros in debt, 2/3 (242 billion euros) is in the hands of the official sector (EFSF and ESM), is non-tradable and “locked in” at just under 1%. Of the approximately € 90 billion in bonds currently being traded, € 38.67 billion are in the ECB portfolio, through purchases made under PEPP between March 2020 and March 2022. Greece is therefore exposed to market fluctuations, with around € 51 billion in bonds. The increase in interest rates will mainly affect the cost of borrowing in the real economy and much less the public borrowing, which has created “mounds” to avoid worse situations.

The fourth largest economy in the Eurozone, Spain, is also under pressure, as is Portugal, while the leading power in the Eurozone, Germany, saw its 10-year yield jump to close to 1.5%.

The intervention of the ECB

The president of the European Central Bank, Christine Lagarde, spoke at the last meeting of the monetary policy council on “new means” for the “European south” to avoid turmoil when interest rate hikes begin to materialize. However, the concern is whether these new media will come at the right time and in the right proportion.

This is because the official announcements for interest rate hikes, one in July and one in September, are based on inflation forecasts which can not yet be considered safe. In other words, if the prediction that inflation is peaking somewhere here is refuted (like the one that wanted inflation to be a cyclical phenomenon), the ECB will be forced into a more aggressive political increase in its interest rates, which will de facto affect the growth of the Eurozone. .