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S&P warns of a risk of a new debt spiral (photo: F.Dubessy)
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EUROPE. According to a study by the rating agency S&P Global, Europe risks falling into a new "debt spiral".
"Despite the efforts of European governments to increase risk-sharing in relation to the budgetary cost of the pandemic, we have observed that there are few signs that European banks are moving in this direction," says the publication, which was released on Monday 21 September 2020. "On the contrary, they have concentrated more risk in their home countries by buying more sovereign debt from their home countries, especially in the countries where its weight is greatest, thus increasing, in our view, the risks of a new debt spiral if this trend persists," warns S&P. This is new because in 2011, at the height of the eurozone crisis, fears of insolvency in some countries had already - due to the weight of sovereign debt in some banks - created a carry-over effect on the banking sector.
With €210bn of home-country sovereign bonds purchased by banks since the start of the pandemic, there is a high risk that the same situation will produce the same effects. All the more so as banks "have concentrated more risk in their home countries by buying more sovereign debt from their home countries, especially in the countries where its weight is greatest". S&P Gobal believes that this increases "risks if this trend persists". But also that large-scale state guarantee mechanisms to support the economy amplify the risks associated with sovereign debt.
The study shows that today the share of national sovereign debt in bank portfolios varies greatly between countries. Between 5 and 10% of the total outstanding credit to the private sector in France and Germany, it rises to 20% in Spain and Portugal, to approach 50% in some Central and Eastern European countries.
"Despite the efforts of European governments to increase risk-sharing in relation to the budgetary cost of the pandemic, we have observed that there are few signs that European banks are moving in this direction," says the publication, which was released on Monday 21 September 2020. "On the contrary, they have concentrated more risk in their home countries by buying more sovereign debt from their home countries, especially in the countries where its weight is greatest, thus increasing, in our view, the risks of a new debt spiral if this trend persists," warns S&P. This is new because in 2011, at the height of the eurozone crisis, fears of insolvency in some countries had already - due to the weight of sovereign debt in some banks - created a carry-over effect on the banking sector.
With €210bn of home-country sovereign bonds purchased by banks since the start of the pandemic, there is a high risk that the same situation will produce the same effects. All the more so as banks "have concentrated more risk in their home countries by buying more sovereign debt from their home countries, especially in the countries where its weight is greatest". S&P Gobal believes that this increases "risks if this trend persists". But also that large-scale state guarantee mechanisms to support the economy amplify the risks associated with sovereign debt.
The study shows that today the share of national sovereign debt in bank portfolios varies greatly between countries. Between 5 and 10% of the total outstanding credit to the private sector in France and Germany, it rises to 20% in Spain and Portugal, to approach 50% in some Central and Eastern European countries.
