Business | Opinion
Euro zone public debt to hit record in 2010
Worries about higher taxes choking off recovery will lead governments to issue fewer short-term Treasury bills
- Reuters
- Published: 23:05 August 20, 2009
London: Record euro zone government borrowing this year will be surpassed in 2010 despite growing economic optimism, as issuers rebalance portfolios away from Treasury bills and face ongoing, recession-busting expenditure.
Some analysts say gross government bond issuance next year could be as much as 225 billion euros ($317 billion) up on 2009.
Governments will want to issue fewer short-term bills while they can lock in longer-term funds at low rates before an anticipated rise in yields, thereby putting off inevitable tax increases that might choke off a fledgling economic recovery.
Sovereigns with the highest borrowing costs in the euro zone like Greece and Ireland may also want to pre-fund 2010 while yields are lower.
Even if the premium for these funds over benchmark German Bund yields diminishes as the economic landscape brightens, it may not fully compensate for a general rise in absolute yields.
Last week, the two largest euro zone economies, Germany and France, reported a surprise increase in gross domestic product. Improving economies after the two-year global credit crisis mean higher tax receipts and a chance to rely less on borrowing funds by issuing bonds.
Sensing recovery, equities have rallied since March and posted index levels last seen in November when the global credit crisis was entering its darkest phase.
But economists reckon that as recession fades, the invoice for the largest-ever peacetime debt issuance will be mostly still unpaid and economies too fragile for tax rate hikes.
"If stage one of global turmoil was the banking and financial crisis and stage two was the economic crisis, the current phase - stage three - can be described as an ongoing crisis in public finances," said Kristin Lindow, senior vice-president at ratings agency Moody's Investors Service."Governments have leveraged up their balance sheets to compensate for private sector deleveraging."
Lindow said intervention could be necessary until household and bank balance sheets are made healthy again, even as exit strategies to unwind such interventions are also beginning to be discussed.
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