Analysis-Fiscal rules revamp may threaten calm in euro zone's fragile bond markets
By Stefano Rebaudo
(Reuters) — The recent calm in bond markets of the most indebted euro zone nations could quickly flip to turmoil in 2024 if investors already nervous about debt sustainability and high interest rates are spooked by more rigid post-pandemic budget rules.
Analysts believe Germany's budget crisis will mean tougher fiscal policy in the largest euro zone economy in 2024, which could add to pressure on less wealthy members of the bloc to keep a tighter grip on their finances.
That could reverse a trend that has seen the premium investors demand to buy bonds of euro zone governments over benchmark Germany shrink more this year for indebted economies like Italy than it has for the «core» of wealthier countries.
Italian 10-year bonds currently yield around 173 basis points more than German debt, 38 bps less than a year ago, while the gap between Portuguese and German yields has narrowed by 34 basis points. French bonds meanwhile yield 58 bps more than German, 5 bps more than a year ago.
Investment bank BofA nonetheless warns that Italy's huge debt burden means it is «one shock away from threat to debt sustainability».
«The euro area has to avoid making the same mistake it made more than a decade ago, when both fiscal policy and monetary policy were too tight,» said Ruben Segura-Cayuela, European economist at BofA.
«Too-aggressive simultaneous tightening could threaten the resilience that the periphery, and peripheral spreads, have shown so far.»
During the European sovereign debt crisis of 2010-2012, some countries — including Greece, Italy and Spain — saw their borrowing costs rocket, raising questions over how easily they might be able to repay their debts.
European Union finance ministers are in the
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