Wednesday

17th Aug 2022

ECB and rating agencies issue warnings on EU debt

A collection of prominent voices warned EU member states on Tuesday (26 January) about the risks of rising indebtedness hampering economic recovery and spooking financial markets.

European Central Bank chief economist Juergen Stark said the shocking state of public finances could lead to further credit rating downgrades of government bonds and ensuing market turmoil.

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  • The financial crisis has seen a huge surge in government borrowing (Photo: Thomas Hawk)

"We are seriously concerned about forecasts of strong rises in government deficits and the indebtedness of countries in the eurozone," he said in a speech.

Credit rating agency Fitch pointed to the expected heavy toll of the rising debt levels. On average, nearly one fifth of national output will be absorbed by debt costs this year, but in some countries such as Italy, France and Ireland, it will be about one quarter, said the agency.

"The increase in the stock of short-term debt is a source of concern to Fitch as it increases market risk faced by governments, notably exposure to interest rate shocks," said associate director for sovereign debt, Douglas Renwick.

Following a study of 15 EU countries and Switzerland, the agency found that gross borrowing this year "in absolute terms is projected to be largest in France (€454 billion), Italy (€393 billion), Germany (€386 billion euros), and the UK (€279 billion)."

However, Italy, Belgium, France and Ireland are forecast to have the highest borrowing as a percentage of GDP, all at about 25 percent.

Separately on Tuesday, Spain's finance minister Elena Salgado told the European Parliament's economic committee that she wants to see "rigorous and consistent" enforcement of EU budget rules that limit budget deficits to three percent of GDP.

Spain, currently holders of the EU's rotating presidency, is estimated to have run up a deficit of around 11 percent last year.

Action

The warnings come amid concerns the ongoing Greek debt crisis and strains in other eurozone countries, notably Portugal and Ireland, are threatening the cohesion of the 16-member euro area.

On Tuesday night, Portugal's Socialist government outlined proposals to bring down the government's deficit over the course of 2010, without hampering nascent signs of recovery.

The country has seen considerable pressure from the International Monetary Fund and credit rating agencies to start implementing measures rapidly, with latest figures suggesting the peripheral state's deficit reached 9.3 percent of GDP in 2009, far higher than previously expected.

Portuguese finance minister Fernando Teixeira dos Santos said the government would cut the budget deficit by one per cent of GDP this year. "By 2013, we will reduce the deficit to below three per cent of GDP," he added.

The European Commission is expected to give its assessment of deficit cutting measures in four EU member states - Hungary, Latvia, Lithuania and Malta, on Wednesday.

A draft copy of the report, seen by Reuters, says Hungary and Latvia are on track with their fiscal cutback programmes, which require the two states to bring their deficits below three percent by 2011.

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