In 2011, net public issuance is expected to remain at a high level, compared to 2007 before the crisis: an additional $ 2 trillion.
But this balance is precarious. How will they be financed? “In 2011, the net total emissions of states should be slightly down compared to 2010, says Jean-Michel Six, chief European economist of Standard & Poors. But we also expect a slowdown in demand because of the individual investors to the equity markets, less support from the Anglo-Saxon central banks (with the gradual reduction of quantitative easing), and less demand from commercial banks with the rise in credit. ”
Indeed, even if the global recovery remains fragile, it should be accompanied by a gradual increase in bank credit. Henceforth, commercial banks in developed countries should use less the liquidity made available by central banks to buy government bonds. “In total, the market is expected to be unbalanced, with supply outstripping demand, and therefore tensions over long-term interest rates that we expect to rise by around 50 basis points (0.5 %) by the end of the year, says Six, but there is a risk that issuers will be in favor: purchases by emerging central banks that recycle their foreign exchange reserves, which could give a little more of oxygen to the markets. ” This presupposes a shift of power to emerging capital-producing countries, such as China, which will be able to demand political or commercial counterparts.
In 2010, in the case of the euro area, institutional investors were tempted to buy more corporate bonds, and they retreated to their national debts.
“PART OF PING-PONG”
In his presentation on January 26, Mr. Mills described as “mind-view” the comparisons between the risk of private and state-owned securities, which raise taxes, and whose revenues are based on diversified activities. He also reiterated that all eurozone states are in a position to be solvent, arguing that growth, the overall indebtedness of the zone – weaker than that of the US or Japan – support to countries in difficulty, and the ongoing reform of European economic governance, despite its slow pace.
“In the second half of 2010, not a single eurozone state had the same opinion on the policy: it looked like a game of ping-pong, comments Mr. Salomon. Since the beginning of 2011, governments have brought their ideas together and demonstrated cohesion; especially France and Germany, which together account for 45% of the gross domestic product (GDP) of the area and propose a ‘competitiveness pact’. This has helped to restore confidence. Logically, this desire should one day lead to a real European tax policy, to close the differences in competitiveness between countries. ”
The AFT chief executive uses another argument: the European Financial Stability Facility (EFSF) lends to countries in difficulty, supported by the International Monetary Fund (IMF), “whose main shareholders are the United States, Japan, and soon China “. “They are therefore not free of risk transfer potential,” says Mills.
Lastly, the European authorities state that funding is provided for fragile states until 2013 when a permanent mechanism for support and resolution of crises will be set up. However, this device could foresee the extreme scenario of a sovereign debt restructuring. Collective action clauses (CAC) would thus be added to public debt issuance contracts. They would apply, says the AFT, “in the unexpected case where one would not be in a situation of crisis of liquidity (but of solvency) in spite of the aids” brought by the European organizations and the IMF. The funny signal for buyers of public securities …
“The CACs, if they are put in place after 2013, will allow all countries to have the same conditions for issuing their debts, says the specialist Barclays.But, initially, two types of debt will there may be a bad time to move in. The new debts will initially be narrower markets and, given the risk of these clauses, investors may demand a higher return. ” Even if it still finds buyers, the public debt can no longer be considered a risk-free product.