The Stability Plan has been drawn up with a scenario in which the yield on the 10-year bond is 0.8%, well below the current 1.8%
The government is closely monitoring the impact of the possible interest rate hike by the European Central Bank (ECB) on the costs of the new planned debt issuances that, among other things, finance the government deficit. These are crucial data for the sustainability of public accounts, which are a big part of the promises of the stability program update sent to Brussels this Friday.
In the document, the Executive acknowledges the risk that the projected downward path for government debt – with the commitment that the ratio closes at 109% of GDP in 2025 – “could be altered in the near term by exogenous factors resulting in a more modest reduction. Among these factors he mentions the rise in interest rates, the decline in the growth of export demand from our trading partners or an increase in oil and gas prices due to their impact on economic growth and thus on debt-to-GDP ratio.
However, under the technical assumptions on which the plan is drawn, the Executive sets the yield on the 10-year Spanish bond (the main benchmark for the market) this year at 0.8%, while the current profitability is 1.8% . “Interest rates used by the executive branch may be optimistic because they do not reflect inflationary pressures,” the Independent Authority for Fiscal Responsibility (AIReF) warns in the report, but nevertheless endorses the government’s macro forecasts.
As the ECB pulls out – ending debt buying and even anticipating the first rate hike in July to fight inflation – countries must assume that they will have to offer higher returns on their new debt issuance to attract other investors. Pull. This means that financing costs will rise. Even more than it has this year, as the bond yield moves from 0.3% at the end of 2021 to close to the current 2%.
Faced with this scenario that foresees greater difficulties in obtaining cheap financing on the market compared to recent years, the government defends the “prudent management” of the treasury in the stability program and assures that the state has benefited from the recent scenario from low rates to reduce the cost of outstanding debt to less than 2% of GDP and extend the measured lifespan until it exceeds the eight-year maximum.
Nevertheless, the end of the stimulus now anticipates more expensive issuance, which could allow the Treasury to accelerate the placement of debt before the upward cycle in interest rates starts.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
