Euro Crisis 2.0 to come if rates rise sharply for longer – Deutsche Bank
06.05.2022, 08:36

Euro Crisis 2.0 to come if rates rise sharply for longer – Deutsche Bank

It has been 10 years since the height of the Euro Crisis. Do we need to be worried of a Euro Crisis 2.0? In the opinion of economists at Deutsche Bank, if rates were to rise sharply for longer, we might well be facing Euro Crisis 2.0.

The ECB has room to increase rates and stop its buying program, but the degrees of freedom are limited

“The good news is that all EZ countries have been able to significantly lower their interest costs relative to GDP. Also, most countries have used the ultra-loose monetary policy environment over the past 10 years to increase the duration of their outstanding debt, making them less sensitive to temporarily rising rates and yields.”

“The bad news is that debt levels have continued to rise. Although lower yields provide relief, these countries will face similar interest costs as a share of GDP at lower yield levels than in 2011. For example, if the yield for 10y Italian bonds were to rise by 2% next year, by the end of 2025 Italy would be facing the same interest burden as a percentage of GDP as it did in 2011 (all else held constant, refinancing via 10y).”

 

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