government debt

Irish bond yields have dropped back as European officials have dramatically scaled back the impact of a sovereign default on bondholders.

Bondholders had been selling off peripheral eurozone debt – particularly Irish – since Brussels announced they might need to accept a loss – or haircut – in the value of their holdings should a default occur. This effectively reduced the future value of bonds held. The precise nature of who would lose what has remained unclear, as the sell-off sent bond prices down and yields above 9 per cent yesterday for Irish 10-year debt.

Now finance ministers appear to have backtracked, saying 

Per capita GDP growth as a function of [public debt/GDP]Beware governments sporting 90 per cent public debt-to-GDP ratios: that’s the conclusion of a new research paper from the ECB.

Up to 90-100 per cent, increasing public debt increases GDP growth, finds the research. Beyond this magic range, increasing debt is associated with ever lower growth rates (see chart, right).

More than this, debt-fuelled increases in the growth rate start to slow when public debt reaches 70-80 per cent of GDP. Austerians will be pleased. A handy map from the Economist, left, shows us which countries are likely to feel the heat first. But even German debt may classify.

The paper, by Cristina Checherita and Philipp Rother, looked at the average impact for 12 eurozone countries since 1970:

It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP.

 

Die Zeit apparently reports Germany’s debt-to-GDP ratio could rise to 90 per cent when the government includes bad bank debt in its calculations, as recommended by Eurostat in July.

WestLB assets are apparently already included in the calculations, but the additional of Hypo Real Estate might indeed increase the ratio, the ministry apparently confirmed

Freddie Mac 30-year mortgage rates just fell to a fresh all-time low of 4.54 per cent (see chart, right). But it’s not just homeowners who can borrow more cheaply than ever.

The US government’s cost of debt is at, or approaching, its lowest ever levels in the medium-term (<10 years). Yields on Treasury auctions have been falling gently and consistently as demand has risen.

Rising demand for US debt is usually taken as an indicator of risk aversion in the markets. But should US bonds be seen as a safe haven with so much strength in east Asia and Australasia, and such ‘unusual uncertainty’ facing the West?

Auction results of US government bonds are shown below from 2008, or as far back as the data go, for you to puzzle over: 

Foreign holdings of US debt rose during May, but only by $0.6bn, the slowest increase since September 2009. Tic data show the UK remains the major buyer of treasuries, with $142bn additional value since the start of the year, nearly five times the purchases of the next biggest buyer, Canada. The rest of the world, in net terms, bought $100bn in that same time period.

A few noteworthy trends reversed in May. China and Japan, between them holding 42 per cent of US treasuries, sold off after months of net purchases. Russia, which had been selling, bought. 

Ralph Atkins

Jürgen Stark, the European Central Bank executive board member, was closely involved in drawing up the European Union’s fiscal rules when he worked in the 1990s at the German finance ministry. In the past year, he has seen how ineffective they proved - largely, he believes, because of the example Germany set in 2005 demanding their loosening after flagrantly breaching them itself (by which time Mr Stark had become a central banker). Now, he is lobbying actively for a revised, tougher rule book.

Earlier this week, Mr Stark told a Frankfurt conference that proposals put forward by the European Commission “are not the quantum leap that is needed”. Speaking in Vienna today, Mr Stark backed a series of changes along the lines set out by the ECB in their recent paper on eurozone governance. As I have written, these focus on imposing sanctions earlier and with more “automaticity”. (Is there such a word in English?)   To me, it seemed Mr Stark had been actively involved in compiling the ECB’s recommendations. 

The US government can borrow from the market for five years at a rate 2.6 percentage points lower than for Portugal. Bond yields continue to fall for medium-term US debt (they fell yesterday for 2-year bonds too), even though very short-term debt rose (4-week treasuries reverse trend (Jun 22)).

The medium yield was 1.925 per cent, down from 2.07 per cent at the last auction on May 26. Tomorrow is the 7-year auction: on current trend, the rate will be lower than a month ago, when it was 2.75 per cent.

Ralph Atkins

The European Central Bank is obviously uncomfortable at having been forced to intervene in eurozone government bond markets, which has caused such controversy in Germany. Its proposals for the future governance of the eurozone, just released to coincide with the European Union summit in Brussels, include the suggestion that a future European crisis management institution should be given powers to buy sovereign bonds to “address disruptions in markets”. In other words, if it got its way, the ECB would not have to take such steps again.

Among the ECB’s other suggestions are that the possibility of a country being expelled from the eurozone should be ruled out “because the very existence of this option would put the viability of the common currency into question”. 

Ralph Atkins

Are eurozone governments insolvent? That is a question the ECB appears to be asking in its latest monthly bulletin. A special section calculates eurozone average net government debt – debt minus governments’ financial assets – has hovered around 50 per cent of gross domestic product in the past decade and increased to 53.4 per cent last year. Those high figures, it concludes, “impl[y] that the financial assets held by governments do not constitute a sufficient buffer, especially as some of these assets are illiquid.” (emphasis ours)

Scary? Possibly, but the ECB does not say whether the position is any worse than elsewhere in the world. More crucially the financial assets of governments are only part of their total assets. “Ideally, it would also be interesting to measure government net worth,” the section says. “However, this is currently not feasible given the unavailability of data on government non-financial assets.” Quite right too – how would Greece ever put a value on the Acropolis?

Attention is focusing on Spain. Dominique Strauss-Kahn – who’s in the region anyway, apparently – will take the opportunity to visit the country on Friday to discuss the economy with the PM.

Agenda items might include Spanish sources of debt, following a disappointing bill auction on Tuesday, highest government bond yield spreads since the mid-90s, and data from RBS showing that Spanish institutions’ net borrowing from the ECB is at an all-time high (see chart). Note that the Spain is bucking the euro area trend, which has seen total euro area net borrowing fall by a sixth since its April 2009 peak of €629bn. The white line shows Spain’s borrowing as a proportion: now at a high of 16.5 per cent. High borrowing from the ECB suggests Spain is struggling to raise debt at reasonable rates elsewhere.

Spain is tackling problems in its economy. A raft of austerity measures