A sense of relaxation has been observed among investors in euro zone government debt in recent years. Countries like Portugal, Spain, and Greece, along with other longstanding members, have been enjoying relatively similar borrowing costs. The difference between the highest and lowest yield, which are currently held by Italy and Germany, respectively, is at its smallest point since before the collapse of Lehman Brothers. This suggests that the euro zone is, for the time being, trading almost as a single, cohesive bloc. However, given the high and increasing debt ratios, particularly in France, it is believed that this calm may not endure.
Following the Greek debt crisis that commenced in 2009, a surge in the range of yields among member states was witnessed as investors began to express concerns about countries potentially defaulting on their debt or exiting the group. These anxieties resulted in substantial risk premiums for the so-called peripheral members, which included Greece, Portugal, Spain, Italy, and Ireland. That specific set of worries has since subsided. As of Monday, the gap between the highest and lowest yield was just under 0.9 percentage points, which signifies a level of convergence that has rarely been seen since 2008. This figure can be compared to the average of 3.2 percentage points over the last decade, according to an analysis of LSEG 10-year government bond data for the original member states plus Greece, with low-debt Luxembourg being excluded.
Several factors are believed to be responsible for this positive development. For one, the euro zone is considered to be much less vulnerable now. The risk of a breakup is lower, and its tools for crisis-fighting, such as the bond-buying programs of the European Central Bank, have been better established. The bloc’s debt markets are said to be a reflection of changes in individual member states. Germany, which has typically traded at a much narrower level relative to many of its peers, has started to borrow more, a move that makes its debt less scarce and has pushed up yields. Concurrently, the once crisis-afflicted countries are appearing more resilient, which has made investors more willing to lend to them at a lower rate. This is considered to be particularly true for Ireland, Portugal, Spain, Greece, and even Italy. The so-called spread of the latter, which is the gap between its 10-year yield and Germany’s, has been almost halved over the past year.
However, the higher overall debt ratios that are currently prevalent are said to be raising the stakes and implying that the situation could easily deteriorate. The debt positions of the various countries are thought to be more precarious now. It is noted that approximately four out of all member states have a debt ratio greater than 100% of GDP, which is a significant increase from just two in 2008, making them susceptible to shocks. Furthermore, for some states, those debt levels are still on the rise. It is reckoned by the IMF that by 2030, France will have a higher debt load than Greece and will be more than 100% of GDP greater than Ireland. The current convergence in yields may soon be looked upon as a temporary blip rather than a new and enduring state of affairs.
