Investors will have to step in and buy about 300 billion euros more eurozone government debt next year to prevent market turmoil as the European Central Bank starts to cut its vast bond holdings, analysts have warned, Report informs referring to Financial Times.
The ECB is due to outline plans to shrink its 5 trillion euros bond portfolio on December 15, alongside an increase in interest rates of at least 0.5 percentage points to 2 percent, as it steps up its efforts to tame soaring inflation by tightening credit conditions.
The central bank’s plan to cut its support for sovereign bond markets comes as eurozone governments are set to issue more debt next year to cover the cost of shielding households and businesses from the impact of high energy prices this year.
Analysts say member states’ increased debt issuance, coupled with less bond buying from the central bank, could revive concerns over whether the high debt levels of some countries are sustainable and spark fears of a repeat of the region’s 2012 sovereign debt crisis.
Governments in the 19-country euro area are expected to increase the amount of debt they issue from 1.1 trillion euros this year to about 1.3 trillion euros next year, according to Pictet Wealth Management. The ECB, meanwhile, is expected to reduce its bond purchases by about €300bn compared with this year, according to Pictet.
Ludovic Subran, chief economist at the German insurer Allianz, warned about a repeat of tensions that flared in 2012. “We could see another test of European solidarity, with very little growth prospects, high debt and rising interest rates,” he said.