Higher debt service in Europe; US Debt ceiling, French-German Anniversary, Brazil, construction, earnings & more
Ludovic Subran
Group Chief Investment Officer at Allianz, Senior Fellow at Harvard University
Lucky money: While we move into the lunar year of the rabbit, which is said to bring longevity, peace and prosperity (hic!), we present the second edition of our new weekly format featuring a deep-dive, and shorter stories about what’s ahead, potentially moving the markets – and the mood. This week’s edition comprises a feature on quantitative tightening and the government debt burden (and related debt servicing costs) in the Eurozone. Also high on the agenda this week: the US nearing its 31.4trn USD debt ceiling; a pulse check of the Franco-German partnership as the élysée treaty marks its 60th anniversary; a closer look at Brazil’s roller-coaster prospects; our insolvency forecast for the construction sector, and a glimpse of capital markets’ mood as we enter a challenging earnings season. We value your feedback, so do let us know how you like the new weekly format so far! Last but not least a batch of updated country risk reports for the CEE region this week. ?
Our feature story: Eurozone - quantitative tightening and sovereign debt servicing cost
The complete ‘hot’ topic report including the feature story at your fingertips here.
The ECB will start quantitative tightening (QT) in March, but the balance sheet reduction is likely to be limited at the planned run-off rate of government bond holdings. While the stock effect is relatively small due to capped reinvestments of amortizing assets, the flow effect will significantly impact the term premium (due to the flat term structure), and, thus, raise sovereign borrowing costs. We estimate that the current run-off rate could raise the term premium of the 10-year German Bund by about 90 bps until end-2024.
Government debt burdens have increased massively in 2022 after years of favorable financing costs and will increase further in 2023-24?despite some relief from lower rollover risk due to longer debt maturity profiles. We estimate that higher expected policy rates and term premia will increase the debt-servicing cost by 0.7% of GDP in Germany, 1.1% in France, 1.2% in Spain and 1.6% in Italy until 2030.
Other market movers: US debt ceiling, élysée Treaty 60th Anniversary, outlook for Brazil, bankruptcies in the construction sector, and clouds over the capital market rally
The complete ‘hot’ topic report including the feature story at your fingertips here.
领英推荐
Allianz Risk Barometer 2023 – Cyber and business interruption top threats as economic and energy risks rise
The full report and additional materials can be found here.
Allianz released its 12th annual survey of key business risks around the world, according to 2,700+ respondents; Natural catastrophes and Climate change drop down the rankings as companies prioritize pressing macroeconomic concerns – inflation, the energy crisis and possible recession. And: the pandemic outbreak plummets down the list of worries as Covid-19 restrictions have largely been removed. It is both stability and change in the Allianz Risk Barometer 2023 and rank as the biggest company concerns for the second year in succession (both with 34% of all responses). However, it is such as inflation, financial market volatility and a looming recession (up from #10 to #3 year-on-year), as well as the impact of the (a new entry at #4) which are the top risers in this year’s list of global business risks, as the economic and political consequences of the world in the aftermath of Covid-19 and the Ukraine war take hold. Such pressing concerns call for immediate action from companies, explaining why both (from #3 to #6) and (#6 to #7) drop in the annual rankings, as does (from #4 to #13) as vaccines have brought an end to lockdowns and restrictions. is another new entry in the top 10 global risks at #10, while rises to #8. Changes remains a key risk at #5, while drops two positions to #9.
Macroeconomic developments such as inflation or economic and financial market volatility rank as the third top risk for companies globally in 2023 (25%), up from #10 in 2022 – the first time this risk has appeared in the top three for a decade. All three major economic areas – the United States (US), China and Europe – are in a crisis mode at the same time, albeit for different reasons, according to Allianz Research, which forecasts recession in Europe and the US in 2023. Inflation is a particular concern as it is ‘eating’ into the price structure and profitability margins of many companies. Like the real economy, the financial markets are facing a difficult year, as central banks drain excess system-wide liquidity and trading volumes even in historically liquid markets decline. 2023 will be a challenging year; in purely economic terms, it is likely to be a year to forget for many households and companies. Nevertheless, there is no reason to despair; For one thing, the turnaround in interest rates is helping, not least for millions of savers. The medium-term outlook is also much brighter, despite – or rather because of – the energy crisis. The consequences, beyond the expected recession in 2023, are already becoming clear: a forced transformation of the economy in the direction of decarbonization as well as increased risk awareness in all parts of society, strengthening social and economic resilience.
Updated Country risk reports
We’ve recently updated our assessment for a batch of countries in the CEE region:
Bulgaria: Rated B2 (medium risk for enterprises), as stagflation fears are spreading.
Croatia: Rated B2 (medium risk), with the Eurozone membership mitigating financing risks amid the global downturn.
Hungary: Rated B3 (sensitive risk), with worrisome macroeconomic imbalances and a deteriorated investment climate.
Slovakia: Rated A1 (low risk), while the economy is adversely affected by high energy prices.