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Soaring government debt levels could “reignite pressures” on the most vulnerable economies across the continent, its economists added. Debt levels are expected to rise well above those witnessed after the 2008 financial crisis, according to the ECB’s biannual financial stability review. Eurozone governments’ budget deficits are forecast on average to rise to eight percent of gross domestic product.
The review warned: “The pandemic represents a medium-term challenge to the sustainability of public finances.”
The ECB has predicted that Europe will experience its worst recession since the end of the Second World War.
“A more severe and prolonged economic contraction than envisaged would risk putting the public debt to GDP ratio on an unsustainable path,” the central bank said.
Such a collapse could easily “cascade” to the rest of the economy, it added.
The ECB has forecast aggregate government debt to increase from 86 percent of GDP to over 100 percent across the Eurozone.
The 19-country bloc is set to be put under pressure by huge debt piles racked up by the likes of Greece and Italy, as well as France and Spain.
Athens is expected to see its public debt jump to almost 200 percent of GDP and 160 percent in Rome.
Portugal’s is forecast to hit 130 percent and just below 120 percent for Paris and Madrid.
The ECB said: “The associated increase in public debt levels could also trigger a reassessment of sovereign risk by market participants and reignite pressures on more vulnerable sovereigns.”
It added that Italy must refinance more than 15 percent of its debt in the next year, while for France, Spain, Belgium, Finland and Portugal that figure is more than 10 percent.
The Frankfurt-based bank has spent years warning Eurozone countries to address their mounting debts.
But the finances needed to rebuild after the coronavirus outbreak has increased the “renomination risk” among investors, the danger of some countries quitting the euro or even the single currency collapsing altogether.
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ECB vice-president Luis de Guindos said: “The increase in public debt comes on top of already higher debt levels in some sovereigns.
“In the medium term we have to pay attention to the fiscal sustainability situation.”
The ECB wants the richest economies to lower the borrowing costs for their poorer neighbours in order to keep the Eurozone afloat.
“We hope that a fiscal response will not only come from national authorities, but that it will come as well from pan-European authorities.
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“We hope that the decisions will be taken by the European Commission and the European Council will go in that direction.”
Commission President Ursula von der Leyen will today unveil her blueprint for an EU-wide recovery fund to pay for the impact of the pandemic.
She is expected to announce plans for the EU to jointly borrow €500 billion to help rebuild economies.
The money will be distributed to coronavirus-stricken regions and industries in the form of grants and low-cost loans.
But some member states, like Austria and the Netherlands, have opposed the idea, insisting on strict conditionality for any handouts.
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