BarcelonaThe meeting of the finance ministers of the eurozone countries was marked this Thursday by the return of public debt as one of the main risks of the economy of the Old Continent.
The escalation of prices due to the rise in energy prices caused by the Russian invasion of Ukraine, which has put consumer goods prices at an all-time high for the past 40 years, has forced most central banks to act. The measures that monetary regulators have opted for, however, have not quite convinced investors, which was noticed this Thursday in both the European debt markets and the stock markets.
In fact, on Wednesday the governing council of the European Central Bank had to meet in an emergency to announce that it would study the creation of a new mechanism to buy mass debt from member states. The removal, from July, of existing bond-acquisition programs so far that ECB President Christine Lagarde announced on Thursday last week did not please investors. Markets felt that peripheral countries such as Italy and Spain – more indebted than those in the center, such as Germany – would be left helpless by the financial support they had received from the institution since 2015.
The Spanish and Italian risk premium – the difference between the yield on a bond compared to the German, the benchmark in Europe – soared until Wednesday. However, the ECB’s reversal has served to moderate the rise, but not to bring interest rates back to the level of a few months ago. On Thursday, the yield on securities rose slightly to 2.89% in the Spanish case and 3.88% in the transalpine. Germany has also seen its debt rise, with a yield of 1.7%.
At a meeting in Luxembourg, European ministers expressed confidence in the ECB’s policies. “We are seeing some increase in risk premiums among member states, but there is no need to worry,” said German Finance Minister Christian Lindner. His Spanish counterpart, Nadia Calviño, also described Lagarde’s decision to study a new debt purchase program as “good news” as it would “guarantee the financial stability” of the eurozone.
Fear of a recession in the US
Fears of anti-inflationary measures are not limited to Europe. In the United States, the Federal Reserve raised interest rates by 0.75 percentage points on Wednesday, and the announcement was not well received by investors the next day. On Wall Street, major stock indices face the day with losses of around 3% due to the growing possibility of the United States going into recession.
Interest rates – which the ECB also plans to raise in July, following in the footsteps of the US – are what central banks charge commercial banks to lend them money. Such an increase, therefore, leads to an increase in the interest that financial institutions charge their customers on loans. In fact, the average interest rate on a mortgage in the US was 5.78% yesterday, the highest in 13 years.
If citizens and businesses have to pay more to get into debt, this reduces the money they have available and causes consumption to fall in the economy as a whole. With less consumption, companies have to cut prices to maintain sales volumes, exactly what central banks are looking for. However, the downside is that a fall in consumption leads to a fall in economic activity, as was already recorded in the first quarter, when the US economy contracted by surprise by 0.4%. After two years of pandemic and with some sectors still in full recovery, investors do not like the idea of a new crisis.