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Europe's pandemic debt burden is large but sustainable, the ECB's chief economist says

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  • European governments are spending trillions to protect their economies against the coronavirus pandemic, but their debt burden is sustainable, according to European Central Bank chief economist Philip Lane. 
  • “Yes, there will be more public debt at the end of this, but in fact that is the correct response to this type of pandemic emergency,” Lane told Portuguese broadcaster RTP3 in an interview on Monday.
  • Low interest rates in the eurozone mean the cost of payments on this debt burden will be contained for years to come, Lane said.
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European governments are racking up debt in order to shield their economies from the impact of the coronavirus pandemic, but low interest rates mean this burden is sustainable, in stark contrast to conditions a decade ago that triggered the region’s borrowing crisis, European Central Bank chief economist Philip Lane said on Monday.

Lane told Portuguese broadcaster RTP3 in an interview that while the pandemic was a large shock, it was temporary in nature and fiscal support – in the form of cheap borrowing conditions – was the correct response.

“Yes, there will be more public debt at the end of this, but in fact that is the correct response to this type of pandemic emergency,” Lane said, according to a transcript of the interview. 

Coronavirus has killed well over a quarter of a million people across the whole of Europe and plunged the region into recession. In response, the ECB has kept interest rates at zero in order to keep credit flowing to businesses and households, while national governments are spending trillions in employment support schemes and other benefits to prevent total economic collapse. 

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Even though public debt across the euro zone will easily reach 100% of gross domestic product, the prospect of a repeat of the sovereign debt crisis of 2010-2012 is very remote, Lane said.

“Across Europe there will be significant increase in public debt, but when you look at the very low interest rates right now, the cost of making the payments on this debt in the years to come will be quite contained. If you look at the market, the market also thinks that this can be handled,” Lane said.

“There is no reason to believe that this has some kind of intrinsic dynamic that will lead us to a return of the conditions of ten years ago,” he added.

Yields on German 10-year bonds, widely regarded as the safest in the region, are around -0.55%, while those on nations perceived to be riskier, such as Italy or Greece, are trading at between 0.60 and 0.70%. At the height of the crisis in late 2011, the yield on Italian bonds was closer to 7.0% and that on Greek debt hit 38%. 

“We heard from the ECB Chief Economist Philip Lane overnight as he reaffirmed that the ECB will provide enough monetary stimulus at its next meeting to make sure governments, companies and households have access to cheap credit throughout the coronavirus crisis. He added that, “Our orientation is to keep financing conditions favorable,” Deutsche Bank strategist Jim Reid said in a note.

The ECB’s €1.35 trillion bond-buying programme, together with a number of other policy tools also helps provide a safety net for sovereign issuers.

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