# For some European states, rising debt costs rekindle 2011 crisis memories Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-05-10 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: European Bond Yields Surge: Are We Facing Euro Crisis 2.0? Meta Description: European bond yields on the rise, sparking fears of a new debt crisis. Are Italy and Greece at risk? Check out the latest analysis by Reuters. URL: https://financedigest.com/for-some-european-states-rising-debt-costs-rekindle-2011-crisis-memorieshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-05-10t113521z1lynxnpei490ijrtroptp4bank-stocks-yields-1736815750665-compressed.jpg) By Dhara Ranasinghe LONDON (Reuters) – The rise in European bond yields is alarming some economists, who warn that Italy and Greece in particular do not have much wiggle room before their debt servicing burden starts rising, rekindling memories of the 2011-2012 euro debt crisis. Just five months into the year and even before the European Central Bank tightens policy, French and German 10-year debt yields are up over 120 basis points and set for their biggest annual surge since 1999 – the year the euro was born. Spanish, Italian and Portuguese yields are up more than 155 bps. Higher yields are not confined to Europe – Janus Henderson predicts debt interest [costs globally will rise by almost 15% this year](https://www.financedigest.com/commonenergy-mistakes-costing-homeowners-hundreds-of-pounds-each-year.html "Commonenergy mistakes costing homeowners hundreds of pounds each year") compared with 2021. But the [euro bloc](https://www.financedigest.com/euro-zone-october-pmi-adds-to-evidence-bloc-is-heading-for-recession.html "Euro zone October PMI adds to evidence bloc is heading for recession"), with some of the world’s most highly indebted sovereigns, is among the most vulnerable. Indebtedness there has actually risen [since the 2010-2012 crisis](https://www.financedigest.com/biggest-uk-house-price-fall-recorded-since-financial-crisis.html "Biggest UK house price fall recorded since financial crisis"), when spiralling borrowing costs in Ireland and southern Europe threatened the very existence of the euro bloc, partly a result of the unexpected burden of the COVID-19 pandemic. If rates were to rise sharply for longer, we might well be facing Euro [Crisis 2.0,” Deutsche Bank](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") investment strategist Maximilian Uleer said. Uleer said while interest costs had fallen since 2011, debt as a [share of gross domestic product was higher](https://www.financedigest.com/asia-shares-creep-higher-wary-on-fed-and-boj-outlooks.html "Asia shares creep higher, wary on Fed and BOJ outlooks"), especially in countries that were at the epicentre of the 2011 crisis. So if Italian 10-year [bond yields were to rise](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold") by 2% next year, its interest burden relative to GDP would be back at 2011 levels by end-2025, Uleer estimates. The process has already started. Yields on Italian seven-year bonds, which represent the country’s average debt maturity, are now at 2.65%, well above the average or implicit interest rate it has been paying, as estimated by the [European Commission](https://www.financedigest.com/german-economy-expected-to-grow-modestly-in-2023-european-commission.html "German economy expected to grow modestly in 2023 – European Commission") at 2.4%. This matters because any new [debt issued](https://www.financedigest.com/necessary-lessons-in-debt-six-out-of-ten-brits-wouldnt-feel-comfortable-discussing-any-money-issues-with-their-children.html "Necessary lessons in debt? Six out of ten Brits wouldn’t feel comfortable discussing any money issues with their children") from now will likely raise the country’s interest payment costs. French [yields are also above the implicit interest rate](https://www.financedigest.com/shares-slip-yields-rise-as-u-s-data-sparks-rate-hike-concerns.html "Shares slip, yields rise as U.S. data sparks rate hike concerns"), estimated at 1.1%, Spanish yields are close to the 2% implicit rate there. This last happened in 2011-2012, Pictet [Asset Management](https://www.financedigest.com/britains-post-brexit-asset-management-revamp-eyes-liquidity-tokenisation.html "Britain’s post-Brexit asset management revamp eyes liquidity, tokenisation") noted. NO SWEAT? For all that, [debt sustainability is not an imminent risk](https://www.financedigest.com/asian-shares-tentative-us-debt-ceiling-talks-weigh-on-risk-appetite.html "Asian shares tentative, US debt ceiling talks weigh on risk appetite"). Borrowing costs remain low by historical standards, while an average [debt maturity of around seven years will shield most countries](https://www.financedigest.com/four-european-countries-call-for-special-treatment-of-defence-in-eu-debt-rules-document.html "Four European countries call for special treatment of defence in EU debt rules – document") from near-term yield spikes. Spain for instance needs to refinance only 15% of its debt this year, a Spanish [Treasury official](https://www.financedigest.com/italy-names-former-treasury-official-to-head-ita-airways.html "Italy names former Treasury official to head ITA Airways") told Reuters, adding that the “deep mark” from the crisis had forced changes to debt portfolios, including by increasing debt maturities. Even for Italy, the direct fiscal cost of [rising rates](https://www.financedigest.com/oil-falls-as-earthquake-impact-on-crude-eases-rate-hike-fears-rise.html "Oil falls as earthquake impact on crude eases, rate hike fears rise") “looks manageable” according to S&P Global European sovereign analyst Frank Gill. Between January and end-April, Italy pre-financed two-thirds of its maximum full-year net borrowing target of 80 [billion euros and at an average refinancing cost](https://www.financedigest.com/australias-nuclear-submarine-plan-to-cost-up-to-245-billion-by-2055-defence-official.html "Australia’s nuclear submarine plan to cost up to 5 billion by 2055 -defence official") of 0.54%, Gill noted. The [bigger risk is that higher rates](https://www.financedigest.com/ecb-weighs-bigger-rate-hike-with-safety-net-for-indebted-countries.html "ECB weighs bigger rate hike with safety net for indebted countries") start to drag on growth,” he said. SLOWING GROWTH, [RISING YIELDS](https://www.financedigest.com/wall-st-stocks-fall-bond-yields-rise-as-china-drops-quarantine-rule.html "Wall St stocks fall, bond yields rise as China drops quarantine rule") [Rising debt is of particular concern](https://www.financedigest.com/shares-rise-but-concern-mounts-over-inflation-flare-up.html "Shares rise, but concern mounts over inflation flare-up"), given growth threats; the International Monetary Fund sees the euro area economy expanding this year by just 2.8%, versus a previous 3.9% prediction. We need growth,” said Pictet [Wealth Management](https://www.financedigest.com/analysis-credit-suisse-collapse-threatens-switzerlands-wealth-management-crown.html "Analysis-Credit Suisse collapse threatens Switzerland’s wealth management crown") fixed income strategist Laureline Renaud-Chatelain. That’s a bit of a worry, as you have the ECB that will, maybe, [raise rates](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") even in a context where we have seen growth decelerating. Unease has driven up the cost of insuring against a debt default in Italy, Spain and Portugal to the highest [since November 2020 in the credit](https://www.financedigest.com/uk-credit-card-borrowing-rises-by-most-since-2005-boe.html "UK credit card borrowing rises by most since 2005 – BoE") default swaps market. Italy and Greece, with debt-to-GDP ratios of 150% and 200% respectively, up from around 120% and 175% in 2011, are in particular focus. Jim Leaviss, chief investment officer at M&G Investments for public fixed income, highlights as crucial the 3% level on Italian 10-year yields, breached recently for the first [time since](https://www.financedigest.com/euro-zone-economy-sentiment-rises-in-dec-first-time-since-start-of-ukraine-war.html "Euro zone economy sentiment rises in Dec, first time since start of Ukraine war") 2018. If yields stay above 3%, then you would [expect the debt burden in Italy to start rising,”](https://www.financedigest.com/german-industrial-orders-rise-more-than-expected-in-february.html "German industrial orders rise more than expected in February") Leaviss said. Goldman Sachs, meanwhile, calculates that a 50 bps rise in [yields](https://www.financedigest.com/stocks-fall-treasury-yields-rise-upon-final-2022-trading-day.html "Stocks fall, Treasury yields rise upon final 2022 trading day") from current levels would put Italy’s debt-GDP ratio on a rising path from 2025 onwards. In Greece, 10-year yields above 3% more than [double the 1.6% weighted](https://www.financedigest.com/the-double-chamber-prefilled-syringes-market-to-throw-its-innovation-based-weight-around.html "The Double Chamber Prefilled Syringes Market to throw its innovation-based weight around") average cost of the debt profile estimated over 2022, Scope Ratings economist Dennis Shen said. That means the average [cost of servicing](https://www.financedigest.com/home-start-lincolnshire-implements-flexible-unified-communications-service-to-reduce-costs.html "HOME-START LINCOLNSHIRE IMPLEMENTS FLEXIBLE UNIFIED COMMUNICATIONS SERVICE TO REDUCE COSTS") outstanding Greek debt is “for the first time in years increasing, rather than decreasing as the government refinances,” Shen added. (Reporting by Dhara Ranasinghe; additional reporting by Belen Carreno in Madrid; Editing by Sujata Rao and Catherine Evans) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---