Euro zone's 140 billion-euro interest windfall could allow spending
boost
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[September 17, 2019] By
Dhara Ranasinghe and Sujata Rao
LONDON (Reuters) - Record-low borrowing costs and falling debt payments
could give the euro zone a 140 billion-euro windfall by the end of 2021,
freeing cash for projects ranging from new roads to climate protection.
This year's slide in borrowing costs has put the bloc's finances in a
far stronger position -- cutting the interest rates it pays, allowing
governments to cheaply refinance older debt, and above all leaving them
with cash in hand.
That's bolstering the case of those who argue the euro zone can and
should spend its way out of economic doldrums. With Germany teetering
near recession and the European Central Bank's monetary policy looking
maxed out, many now regard government spending as the key to lifting
growth and inflation.
At current yields, euro zone governments will save an average 0.10% of
gross domestic product in interest this year, or almost 12 billion
euros, Frank Gill, senior director in the sovereigns team at ratings
agency S&P Global, estimates.
Savings would rise to 0.25% of GDP in 2020 and 0.80% in 2021, Gill says,
noting this was above already expected savings, and the long tenor of
euro securities means debt savings increase over time.
The savings would total around 140 billion euros -- to put that in
context, pent-up demand in Germany for public investment amounts to 138
billion euros, state-owned development bank KfW estimates.
![](http://archives.lincolndailynews.com/2019/Sep/17/images/ads/current/rbc_towing_dailysda_FALLFEST_2018.png)
"It is very significant, this is a windfall really," Gill said. "Since
2013-14, the decline in interest expenditure to GDP, especially in
places like Italy and Spain, has given governments some breathing space.
"(Savings will be )much greater for those sovereigns which have seen
larger yield compression, namely, Italy, Portugal, and Spain, and the
savings snowball over the next two years."
According to Societe Generale, a 10-basis-point drop in bond yields
translates into roughly a fall in interest payments of 0.35% of GDP for
Italy, 0.27% in Spain, 0.22% in France and 0.16% in Germany.
From environment projects in Germany to greater education and welfare
spending in Italy and infrastructure improvements across the euro zone,
the fall in borrowing costs could finally spell the end of austerity.
Ten-year bond yields, the usual reference rate for borrowing costs, have
fallen by half to two-thirds this year. With the ECB resuming rate cuts
and dropping time constraints on asset purchases, yields have little
impetus to rise.
(Graphic: Annual fall in 10-year EZ borrowing costs ,
https://fingfx.thomsonreuters.com/gfx/
editorcharts/EUROPE-BONDS-SAVINGS/0H001QX5L89Z/eikon.png)
Until now, euro zone monetary stimulus has effectively been counteracted
by stringent budgets. ECB President Mario said last week that if fiscal
measures had been in place, they would have complemented central bank
policy and boosted growth.
Globally too, there is a perception that central banks are nearing the
limits of what they can achieve. Former U.S. Treasury official Lawrence
Summers calls it "black hole monetary economics", where small rate
changes and aggressive stimulus strategies have only limited impact.
Jorge Garayo, senior rates strategist at Societe Generale, noted that
U.S. President Donald Trump's fiscal spending plans had boosted
inflation expectations in 2016.
"That had a much bigger impact than QE (quantitative easing)," he said.
"With diminishing returns from monetary policy easing, the only thing
that could push (Europe's) inflation expectations sustainably higher is
if we go through a credible fiscal stimulus, most likely coordinated in
some way."
[to top of second column] |
![](../images/091719pics/busine29.jpg)
The signature of the President of the European Central Bank (ECB),
Mario Draghi, is seen on the new 50 euro banknote during a
presentation by the German Central Bank (Bundesbank) at its
headquarters in Frankfurt, Germany, March 16, 2017. REUTERS/Kai
Pfaffenbach
![](http://archives.lincolndailynews.com/2019/Sep/17/images/ads/current/rohlfs_lda_072017.png)
(Graphic: The euro zone's debt load,
https://fingfx.thomsonreuters.com/gfx/
editorcharts/EUROZONE-BONDS/0H001QX5K89W/eikon.png)
OPPORTUNITY KNOCKS
Euro zone governments have been saving on interest for years as ECB QE drove
down yields. The savings amounted to almost 2% of GDP since 2008, Unicredit
estimates.
The question is, will the budget room now being created persuade fiscal hawk
Germany to drop its opposition to more saved over 160 billion euros in interest
since 2008. This year's windfall, following a 70-basis-point slide in 10-year
yields, may exceed 5 billion euros, Reuters has reported.
Stewart Robertson, senior economist at Aviva Investors reckons if Germany's
10-year bond yields stay around -0.50% and it can raise debt at this level for
four to five years, it would save some 15 billion to 20 billion euros annually.
There are caveats. Lower yields can take years to feed through. Benefits accrue
only when yields fall and stay low for some time. Persistently low yields would
also signal economic weakness, in turn threatening tax receipts.
ITALIAN JOB
Italy, one of the bloc's most indebted members, probably has most cause to
celebrate low yields. Desperate to revive its sluggish economy, it has
frequently clashed with EU authorities for overstepping spending limits.
Now, though, the tumble in its 10-year borrowing costs, to 0.9% from 2.6% in
early 2019, is defusing concern over its 2020 budget, due to be submitted next
month.
Assuming unchanged yields, Rome can save up to 20 billion euros a year in
interest payments, or 1% of annual economic output, Pictet Wealth Management
strategist Frederik Ducrozet calculates. That assumes interest payments are
spread over the years and yields stay low.
The government hopes to use that budget leeway to avoid an upcoming sales tax
increase. Ducrozet noted the Bank of Italy is also profiting from its 400
billion euros of bond holding, most of it bought under ECB QE. That will partly
be redistributed to state funds.
"In plain English, the Treasury is saving money on all fronts, probably over 1%
of GDP on an annual basis," Ducrozet said. "If the political situation were to
improve for whatever reason – arguably a big IF – the fiscal picture would
improve dramatically."
![](http://archives.lincolndailynews.com/2019/Sep/17/images/ads/current/stclara_lda_SPONSOR_090519.png)
(Graphic: Interest costs and Italy govt debt servicing,
https://fingfx.thomsonreuters.com/
gfx/editorcharts/EUROPE-BONDS-SAVINGS/0H001QX5M8B2/eikon.png)
(Graphic: Spanish debt servicing costs tumble ,
https://fingfx.thomsonreuters.com/
gfx/editorcharts/EUROPE-BONDS-SAVINGS/0H001QX6Y8EX/eikon.png)
(Reporting by Dhara Ranasinghe and Sujata Rao; additional reporting by Yoruk
Bahceli in London, Belen Carreno in Madrid and Michael Nienaber in Berlin;
graphics by Ritvik Carvalho and Sujata Rao; editing by Mike Dolan and Larry
King)
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