Will Eurozone be able to repay its debts? Is a bubble forming there?

 European Council - March 2015 (Day 2). In the forefront, from left to right: Matteo Renzi, Italian Prime Minister, Alexis Tsipras, Greek Prime Minister, Francois Hollande, President of France. (European Council – Council of the European Union, Audiovisual Services, Shoot location: Brussels - Belgium, Shoot date: 20/03/2015).


European Council – March 2015 (Day 2). In the forefront, from left to right: Matteo Renzi, Italian Prime Minister, Alexis Tsipras, Greek Prime Minister, Francois Hollande, President of France. (European Council – Council of the European Union, Audiovisual Services, Shoot location: Brussels – Belgium, Shoot date: 20/03/2015).

This newspaper has been very reluctant in endorsing the widely accepted view that Eurozone has left behind its stagnation if not recession phase. The reason is that despite the GDP increases by a few decimal points – not more than three – of a percentage unit, inflation kept falling for more than twelve months until it reached its lowest level at -0.6% last January. After January however the consumer prices index keeps rising albeit remaining in the negative part of the chart reaching -0.3% in February and -0.1% in March. If it crosses to the positive area in April, the upwards tendency may be considered as established. Let’s see what more there is to it.

During the past few months developments regarding headline inflation rates were not the only indication that something may be changing towards the right direction in Eurozone. The overall industrial production index in comparison to the same period of previous year kept rising continuously during the six months up to February 2015. Of course this positive build up is restricted to some decimal points every month. Nonetheless, it represents a firm trend in the right direction.

It’s the €60 billion stupid

However, if it were not for the €60 billion that the European Central Bank spends every month since last March to buy government bonds and asset backed securities, this newspaper would have repudiated all the above mentioned petite positive developments as non-essential. Thanks to ECB’s pledge to circulate newly printed money of €1.14tn until September 2016 in monthly installments of €60bn, Eurozone may finally overcome its stagnation and enter a new growth period, most probably of uncertain vitality. This new money bonanza though had another much more visible result, sending Eurozone government debt prices to new highs and depressing debt yields close to or below zero. In reality this is money for free.

Money for free

It’s a fact now that around one-quarter of Eurozone’s government debt pays negative yields, meaning that investors are currently accepting to lose some money, in order to acquire bonds of that kind. Of course those who bought similar paper in 2014 or earlier are making hefty capital gains. On the contrary, Eurozone government bond paper yields negative returns for those who bought it during the past few weeks. In total the Eurozone government debt has reached now €8tn; that is 92% of GDP.

And don’t you think that it’s only Germany that can issue government debt with negative yields. The Austrian, the Dutch, the Irish and even the French short-term debt paper is traded at negative returns. It was even more surprising to have watched Spain on Tuesday 7 April selling six month government bills of a total value of €750 million at a yield of -0.002%. Even Portugal can place in the capital markets government bonds offering close to zero returns. Of course Greece is in the opposite side of the market, with its ten-year bonds trading at yields around 13%.

Is there a bubble?

Understandably, some economists may call those developments in the Eurozone debt market, a bubble. But bubbles always occur and the problem is how they deflate without ruining a lot of people. In this respect growth will play a central role. Eurozone’s real economy seems now able to start growing again, helped by the ECB’s €1.14 trillion. At the same time, this kind of money has inflated the demand for European debt and will continue doing so. In reality the sings of a bubble are already there and the question is if growth is also dawning.

There is one critical condition though for these two parallel developments to move towards the desirable direction, and this is no other than the degree of prudency that Eurozone’s political elite can show. If they start behaving like the new Greek government, which strongly favors consumption over production, then the bubble will soon burst. However, if the European politicians manage to avoid populism and wisely use the new abilities that the zero cost financing from the ECB offers, then there will be no sudden bubble bursting and a gradual deflation of the public debt balloon may evolve quietly over the next many years.

Can Germany alone do it?

Germany, the largest Eurozone economy together with Holland and Austria are already applying prudent policies. That given, it becomes clear that everything depends on France, Italy and Spain the second, third and fourth largest Eurozone economies. If those major countries manage to take full advantage of ECB’s new money bonanza in order to enter a solid growth path and at the same time secure their ability to repay their debts, Eurozone will have no problem whatsoever.

In short, investing today in Eurozone’s government debt is like investing on its political elite’s ability to wisely steer the economy. Eurostat’s indicators do not yet confirm a solid upwards trend. Not to forget that a Grexit or a Brexit may dangerously perplex all that.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

How Japan became the world leader in floating solar power

World Health Organisation and young doctors: is there any place for improvement?

Bankers don’t go to jail because they are more equal than us all

Botswana has decriminalized gay sex. But, it’s still illegal in 70 countries

From cheeseburgers to coral reefs, the science of decision-making can change the world

Portugal’s pension system needs to prepare for rapid population ageing

Parliament adopts new rules for short-stay visas

The story of 2018, in 10 charts

EU, Brazil to hold high level Summit in Brasilia

Deutsche Bank chased away from US, threatened with more fines

Britain heading to national schism on exit from EU

EU gas market: new rules agreed will also cover gas pipelines entering the EU

Portugal: €4.66 million in aid for 1,460 dismissed workers and jobless young

Central Asia: the European Union matches political commitment with further concrete support

Is China about to launch its own cryptocurrency?

Nuclear weapons in Lithuania: defence against Russia or target for terrorists?

European Citizens’ Initiative: A game of much publicity and one big lie

How drones can help rural Africa take flight

A voice from Syria: the positive prospect of clinical research despite the excruciating circumstances

UN rights experts call on Philippines Government to halt ‘unacceptable attacks’ on Victoria Tauli-Corpuz

Draghi joined Macron in telling Germany how Eurozone must be reformed

How India’s globalized cities will change its future

Siege of Syria’s eastern Ghouta ‘barbaric and medieval’, says UN Commission of Inquiry

The opportunity of studying Medicine abroad

EU consumer rules: Airbnb cooperates with European Commission and EU consumer authorities improving the way it presents offers

Germany openly seeks more advantages for its banks

EU Budget 2019: no deal before the end of the conciliation period

UN Envoy ‘confident’ deal can be reached to avert further violence around key Yemeni port city

EU-Russia relations: the beginning of a warmer winter?

Erdogan’s electoral win on a ‘me or chaos’ dilemma means trouble for everybody

MEPs cap prices of calls within EU and approve emergency alert system

MEPs want robust EU cyber defence and closer ties with NATO

Climate change recognized as ‘threat multiplier’, UN Security Council debates its impact on peace

1.4 million refugees set to need urgent resettlement in 2020: UNHCR

What little Cameron got in Brussels seems enough to keep Britain in the EU

Sustainable development funding is broken. Here’s how to fix it

Take-home pay growing at lowest level since 2008, as gender-gap persists: UN labour agency

EU opens a third antitrust file against Google

UNESCO experts ready to assist reconstruction of iconic Notre Dame, following devastating blaze

UN rights experts call on Russia to release Ukrainian film-maker whose life is in ‘imminent danger’

In this Tokyo cafe, the waiters are robots operated remotely by people with disabilities

EU imposes provisional anti-dumping tariffs on Chinese solar panels

UN welcomes ‘milestone’ release of 833 Nigerian children from anti-Boko Haram force

Ethiopia is Africa’s fastest-growing economy

Mali’s ‘self-defence’ groups must face justice, after deadly intercommunal attacks

Factories are no longer the sure route to prosperity. Here’s why

UN cooperation with League of Arab States ‘pivotal’, UN chief tells Security Council

Parliament votes reform for better European Co2 market but critics want it sooner than later

Outgoing UN official praises Iraq’s ‘exemplary peaceful transfer of power’ at the top

EU to scrutinise foreign direct investment more closely

The world’s landmine stockpiles in numbers

South Sudan ‘heading towards lasting peace and stability’, UN General Assembly told

These are the United States’ most exported products

Google and Apple suddenly realise that doing business in EU is tough?

A Sting Exclusive: Young people are right about climate change; it’s time to listen

Alexis Tsipras against internal and external “enemies” in pursue of a two-phase deal now

EU Banks still get subsidies from impoverished citizens

Libya: Thousands seek shelter in health clinics from Tripoli fighting, UN warns

Disintegrating Tories will void May’s pledge for Brexit deal in seven weeks

The cost of housing is tearing our society apart

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s