Countries with major imbalances will suffer more from the new cycle of monetary policy normalization
Runaway inflation has sparked a wave of rate hikes with central banks around the world ready to do anything to stop price escalation… even if it means pushing economies into recession. A situation that poses a major challenge to states, which will soon face increased costs to finance the massive mountain of debt built up in recent years in the fight against the pandemic. It is true that the specters of a new sovereign debt crisis are just a warning from investors right now. But the countries with the biggest imbalances have been wary, knowing that the rate hikes will lead to increased spending to pay the interest on their debt, so maintaining investor confidence is crucial in this stimulus withdrawal process. “The ECB is changing course and has only just started tightening its monetary policy. Yesto penalizes Spain and Italy,” said Philippe Waechter, head of analysis at manager Ostrum AM.
Italy is the country in focus at the moment, with a public debt of more than 150% of GDP, compared to 117.7% in which the May ratio in Spain rejected, according to data from the Bank of Spain. However, the total balance in our country has skyrocketed in one year by 55,760 million euros to the current 1.44 billion. This demonstrates the fragility that public accounts still exhibit in the face of estimates such as Airef’s, which suggest that the financial burden will increase by 20,000 million through 2025 with the change in the monetary policy cycle.
The greatest tension today is felt in the secondary market, where debt securities are traded. It is true that the situation is not comparable to that of 2012, when Spain financed itself above 7.2% for ten years and the risk premium was more than 600 basis points. But bond yields have surpassed 3% this week. A strong 30% recovery in just four sessions, following the last ECB meeting in which the body confirmed it will implement its first rate hike in 11 years in July. At the beginning of 2022, the bond was trading at 0.5%.
This market warning – which was repeated in other European markets – forced the ECB to make an emergency appointment to remember that risk premiums would not spiral out of control. And while there are no details about its plan, the gesture has seen Spain’s benchmark fall to 107 basis points, from the 137 it reached at the most tense times of the week.
Sources from the Ministry of Economic Affairs acknowledge that emissions will become somewhat more expensive in the coming years, as in the rest of the countries in the region. But they argue that the Treasury’s strategy “has enabled the portfolio to be prepared for the normalization of monetary policy”. The data supports the theory, but the challenge now is to convince investors. Specifically, the Treasury managed to extend the average life of the portfolio to 8.10 years and the cost of interest on debt over income fell to 5% in 2021, a level comparable to that of early 2009. The maximum , in the previous debt crisis , reached 9.2%.
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.
