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.

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

5 of the world’s deadliest infectious diseases

AI is transforming cybercrime. Here’s how we can fight back

More than 750 million people around the world would migrate if they could

Advice on fighting COVID-19 from the Red Cross, a chemist and academics around the world: Today’s coronavirus updates

UN working ‘intensively’ to stop Ebola in eastern DR Congo, following second case in major border town

5 ways to fast-track the transition to a carbon neutral world

Cancer is a growing global threat and prevention is key, UN study shows

How interoperability establishes blockchain’s utility and effectiveness for trade finance

Journey of my life

State aid: Commission approves €199.45 million Italian support to compensate Alitalia for damages suffered due to coronavirus outbreak

UN launches new project to address link between terrorism, arms and crime

€2 billion to fast forward the creation of the European Innovation Council

Governments urged to put first ever UN global migration pact in motion, post-Marrakech

Young people demand a transparent job market: new campaign launches on international interns day

European Youth Forum warns of a Peter Pan generation as a result of financial crisis and response to it

Online government services could change your life. But only if you have access to the internet

Korea must enhance detection and reinforce sanctions to boost foreign bribery enforcement

A health approach to climate change

Future-proofing the European banking market – removing the obstacles to exit

The EU slowly exits from “Excessive Deficit Procedure” and hopefully from ‘Excessive Austerity Procedure’ too

Chicken soup for the digital soul: how to bring community back online

How many websites are there?

Respond to ‘legitimate grievances’ of Sudanese people, UN human rights experts urge, following protests

Heat-resistant crops, ‘green’ infrastructure, can prepare Near East and North Africa to better tackle droughts – UN agency

Tragedy of Mediterranean deaths continues, as seven drown, 57 rescued: UN migration agency

Air Pollution: Responsibility of Technology and Medicine

These are the countries where it’s still illegal to get an abortion

The Great Reset and digital trust: 3 lessons on digital tools from the COVID-19 crisis

Poorer countries set to be ‘increasingly dependent’ on food imports, says UN food agency report

Economic sentiment and business climate stagnate in miserable euro area

AXA and Fremtind discuss how AI and analytics is changing insurance claims forever

Companies need help to overcome rising

How the mobile industry is driving climate progress on the scale of a major economy

Integration of migrants: Commission launches a public consultation and call for an expert group on the views of migrants

Suriname’s climate promise, for a sustainable future

Finland is a world leader in clean energy. Here’s what’s driving its success

Africa’s shrinking lake shows the impact of climate change on women and indigenous people

Chart of the Day: This is how the $88 trillion global economy is spread around the world

What’s really driving corporate climate action?

Trump to subject the Fed, challenge the ECB and make Wall St. bankers even richer

Autumn 2019 Economic Forecast: A challenging road ahead

Respect for fundamental rights and freedoms key for peaceful polls in DRC – UN mission chief

Who cares more about taxpayers? The US by being harsh on major banks or the EU still caressing them?

Human rights ‘core to sustainable development’: deputy UN chief

Harnessing the power of nature in the fight against climate change

OECD sees rising trade tensions and policy uncertainty further weakening global growth

The countries most ready for the global energy transition

Direction Wakanda: finance methods to make Africa a superhero continent

A Young student assesses the Programme for International Student Assessment (PISA)

‘No steps taken’ so far to end Israel’s illegal settlement activity on Palestinian land – UN envoy

UN health agency welcomes Facebook pledge to stop vaccine misinformation from going viral

Our healthcare systems are ailing. Here’s how to make them better

3 charts that show how attitudes to climate science vary around the world

Berlin to pay at the end for Eurozone banks’ consolidation

Labels for tyres: deal for greener and safer road transport

These LGBTQI Davos leaders shared their advice on coming out

EU budget deal struck with Parliament negotiators

National parks give a $6 trillion boost to mental health worldwide

Erasmus+ will finance existing UK-EU mobility in the event of no-deal Brexit

Rural Bangladesh has already embraced renewable energy. Here’s what the rest of the world can learn

More Stings?

Advertising

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