Savings in danger, the risk of default in the Eurozone rises
The Central Bank of Europe issues the public debt alarm in a report from the Financial Stability Review. A document which is published every six months by the ECB. The report says that: “The increase in public debt levels could trigger a re-evaluation of sovereign risks by market participants “. This very dangerous factor could “Reignite the pressure on the most vulnerable government bonds”.
The document does not mention names but it is clear that the references are to Greece and Italy, the weak links at the moment among all the countries of the Eurozone. Spain is not considered a weak link by the markets. This is demonstrated by the spread between the ten-year government bonds of Madrid and those of Frankfurt. The differential is around 120 points, half of our spread, which until a few days ago traveled to 240 points
The pandemic is likely to exacerbate pre-existing debt problems
With savings in danger, the risk of default in the Eurozone rises. What the ECB writes black and white is exactly what the market thinks. And the consequence is the expansion of the BTP-Bund yield differential. In fact, the spread for weeks remained above the 200 basis points threshold, despite the massive purchases of the European Central Bank.
It is clear that the market is pricing Italy with a high risk of debt sustainability. Because the problems brought about by the pandemic have added to previous debt problems. The same ECB says it always in the document when it writes that the consequences of the pandemic on the economy “It has brought to light and exacerbated the already existing vulnerabilities for the eurozone’s financial stability.” The reference to Italy is clear
Banks are the first to suffer, putting savings at risk
But the ECB is also worried about banks. And part of the report is dedicated to the analysis of the banking sector. For the ECB, the problem of “Poor profitability of banks”. And to mitigate this problem, the document highlights what the ECB has suggested. Or “He advised banks to temporarily suspend dividend payments and buybacks, strengthening their ability to absorb losses.”
In essence, the European Central Bank has clear that the recession brought by the pandemic will have a brutal impact on all economies. But the worst effects will be on those with already high public debt before the outbreak. With the risk that the rise in debt may become unsustainable, leading to a probable default, with serious difficulties also for the banking system. Default that would inevitably lead to the loss of savings of many private investors.
It is enough to see what is happening to Argentina today and what has happened since the Buenos Aires default from 2001 onwards