From the magical words “whatever it takes” (whatever it takes) in the summer of 2012 by Mario Draghi, then president of the ECB, the sovereign debt of the countries of the Eurozone has had a period of calm and low financial costs, even negative. Those words were initially more effective than any spell cast by Harry Potter or his Hogwarts co-religionists, and were later accompanied by deeds. In the form of bond purchase instruments, which have facilitated a 10-year period of stability in the sovereign debt market. Some episodes of uncertainty, and especially the crisis caused by the pandemic, extended until 2022 the enormous liquidity that central banks (mainly the US Fed and the ECB) have provided to banks and capital markets. There was money for everything, even to finance private equity or corporate integration operations.
The inflation that began months ago —and is beginning to reach levels not seen for more than 30 years— has forced central banks on both sides of the Atlantic to react. The brutal increase in energy prices —aggravated by the war in Ukraine— and the multiplication of supply problems have exacerbated the inflationary process. Monetary stimuli are gradually being withdrawn. In the next year between one and two trillion of liquidity could disappear from the financial markets, which will put pressure on the credit and debt situation globally, something to which we were no longer accustomed. The rise in official rates is already a fact in the US and the UK. More hikes from the Fed are expected this year. In the debt markets it is already noticeable in the increase in returns and financial costs of debtors. And there is quite a way to go. Although the ECB has not yet raised its rates, in Europe the rise in market rates is already noticeable.
The harshness of what may lie ahead is seen in part of the US yield curve – some yields between 5 and 30 years – which has inverted. Alarm signal of the possibility of recession in that country. If these bad omens are confirmed, the “stagflation” scenario (inflation and recession) that has been talked about with excessive joy lately, with its repercussions for the global economy, cannot be ruled out.
As for sovereign bonds, the financing of future public deficits, especially in countries with greater vulnerability of their public accounts and their economy, may begin to suffer significant stress in the markets, as the ECB’s stimuli are withdrawn. Spain —with public debt at 118.4% of GDP— would not be exempt from this stress. It seems urgent to design a credible fiscal adjustment path. Also other actions that reinforce the resilience of our economy —with so many challenges ahead— that would allow minimizing the negative impact of the sharp decrease in market liquidity on our public and private debt.
He knows in depth all the sides of the coin.
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