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(Bloomberg) — Germany’s new era of big spending is pulling up borrowing costs across Europe, reigniting jitters around fiscal stability on the continent’s periphery.
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Yields on benchmark Italian, Greek, Spanish and Portuguese bonds are over 30 basis points higher compared to the start of the month. The four countries, which were bundled together during Europe’s sovereign debt crisis more than a decade ago, still have some of the highest debt loads on the continent, making them vulnerable to higher interest rates.
Germany has long been the voice of fiscal discipline in the European Union — pushing for countries like Italy and Spain to tighten their purse strings and opposing the issuance of joint debt. But if that policy led to complaints of weak growth, the new, more relaxed approach to spending could have negative implications of its own for Europe’s most indebted countries.
“If Germany embraces deficit spending, other nations may follow suit, leading to a more relaxed approach to debt across Europe,” said Robert Burrows, a portfolio manager at M&G Investments, who says he has reduced his holdings of periphery debt. “This could weaken confidence in European government bonds, raising borrowing costs for highly indebted nations.”
While Germany’s yields have also jumped, consensus in the market is that Europe’s biggest economy can afford to spend billions more euros on defense and infrastructure following years of austerity. The risk is that the move could have repercussions beyond Germany’s borders, especially when European leaders are supporting a plan to loosen budget rules to allow others to spend more on defense.
“Germany is one of the world’s strongest credits, it’s got so much fiscal headroom,” said Colin Finlayson, a fund manager at Aegon Asset Management. “If some of the other European countries attempt to try and follow Germany’s lead, I don’t think it would be as universally well accepted.”
It’s not just the periphery that’s at risk. Debt levels in France and Belgium have ballooned in recent years, putting both countries ahead of Spain and Portugal in terms of debt-to-GDP. A blowout in French bonds last year showed just how quickly bond vigilantes can resurface when highly indebted countries announce plans to increase spending.
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