In 2023, European countries will go into more and more expensive debt with the markets

Posted on December 7, 2022 at 5:30 pm

Energy crisis after the pandemic. In the face of Covid, European countries hoping to end their economic support plans and grow again to reduce their deficits will have to put their hands in their pockets next year. Since Russia invaded Ukraine last February, they have had to take costly measures to protect their citizens from rising electricity, oil and gas prices.

As a direct result, according to Natixis, they will require about 1,200 billion euros more than expected from bond investors next year. “The financial needs of eurozone countries are increasing by around 5%, explains Cyril Regnat at Natixis. And that’s a number that’s bound to change because there’s still uncertainty about the final amount of the tariff shields. »

Next year, Italy should again be the largest borrower, with an emission program estimated at €294 billion. France is ahead of Germany (240 billion) with 290 billion (Natixis estimate takes into account early bond redemptions).

Fixed deficit but jump in payments

In fact, the deficits to be financed for States replacing Covid measures with energy measures have not changed. Olivier Vion at SGCIB emphasizes: “Bonds maturing payments are really changing, from 750 billion this year to 827 billion in 2023. This is largely a legacy of the financial crisis of 2008, when fiscal orthodoxy was somewhat pushed aside by some states and borrowing soared. »

This phenomenon is also fueled by repayments of short-term securities issued during the Covid crisis, which for some will be refinanced with longer debt, especially in Germany, which may be cheaper. . “After the European Central Bank’s key interest rate hike, short-term securities are no longer an obvious option to reduce debt service,” Deutsche Bank analyzed.

A significant retreat from the ECB

The increase in government issuance volumes will be accompanied by the virtual disappearance of one of the biggest buyers of sovereign bonds in the eurozone this year – the European Central Bank. The Frankfurt institution has absorbed the equivalent of a third of the debt issued by European treasuries year after year – on the secondary market – through “classic” (PSPP) or “pandemic emergency” (PEPP) purchase programs. Despite the end of net purchases of the PEPP in December 2021 and the PSPP last June – in the face of rapid inflation – the ECB has remained active this year.

Each month, it reinvested the sums resulting from the redemption of maturing securities in its portfolio, totaling approximately 200 billion euros. However, at the next meeting to be held on December 15, Christine Lagarde, the president of the institution, will present the conditions for reducing the balance of the Central Bank, which exceeds 9,000 billion euros.

“Based on quantitative tightening starting at 1er With the suspension of 50% of PSPP reinvestments in April, then 75% in the third quarter and 100% in the last quarter, 160 billion euros of government bonds will no longer be available next year,” Cyril Regnat reckons. With only 240 billion euros of new debt to buy last year, investors will find themselves with 520 billion of new securities this year, excluding maturing bond redemptions.

A rising interest rate universe

The shock of the announcement of record debt issuance programs in recent years has been partially mitigated by the sharp decline in government borrowing costs. But rising inflation and forced monetary tightening by central banks since the spring have put an end to this golden age. For example, France’s 10-year rate rose from 0.25% in January to 2.25% in early December. And its German equivalent from -0.10% to 1.8%.

This sudden rise in interest rates will increase the cost of finance for 2023. But without causing disaster. Sovereign CDS (derivatives that act as insurance against borrower default) are very stable. Olivier Vion emphasizes: “Interests remain at historically low levels and inflation in the euro zone is around 10% – this should increase tax revenues – growth should not be too painful.” Those high yields could also lure buyers away from negative rates or rates close to 0% back to European government bonds. Thus compensating for the withdrawal of the ECB.

The financial needs of the euro zone countries increased by about 5%.

Cyril Regnate Natixis

HSBC believes that, on the other hand, we should see a reduction in payment terms on the issue. This has been the case since the summer of 2022, and the phenomenon should increase. Investors will have less need to travel the longer part of the curve to find returns that satisfy them.

The European Union inhabiting the landscape

In 2023, the fifth issuer of bonds in the euro zone will not be the country, but the European Union itself. It should borrow between 140-160 billion euros in the markets. Contrary to fears expressed by certain players as they accelerate their troubles through the Sure programs and the Next Generation EU recovery plan, these debt increases do not adversely affect sovereign borrowers.

First, because the funds raised by the EU are allocated to European countries and actually reduce their financial needs. And then, because it is not yet seen as the equivalent of a state. Investors perceive it more as a supranational agency as long as it issues securities under programs in specified amounts. An initiative by Brussels to “bundle” various bond lines to offer greater visibility and liquidity could be the start of normalization. But markets are waiting for a clear signal that it will become a repeat issuer.

Competition on green emissions

European countries are leading the development of green bonds amounting to around €163 billion. And they intend to continue. France even issued its first inflation-indexed green bond this year.

But the European Commission can stop them in their tracks. HSBC warns it has committed to issuing €250bn of green bonds by 2026, making it the world’s largest issuer. However, these amounts are intended to finance environmental measures implemented by euro zone countries. This further reduces the number of projects that are the basis for issuing national green bonds, the bank emphasizes. However, it estimates 36 billion euros worth of new green or sustainable sovereign bonds to be raised next year.

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