By Dhara Ranasinghe

LONDON, (Reuters) – The rising yields on European bonds is alarming economists. They warn that Italy, Greece, and others will have to pay more in the future. This could trigger a return of memories from 2011-12’s euro debt crisis.

Five months in, and before the European Central Bank tightens its policy, the 10-year yields on the French and German German debts have risen more than 120 basis points. This is their largest annual increase since 1999, the year that the euro was created. Spanish, Italian and Portuguese yields increased more than 150 bps.

High yields don’t just apply to Europe. Janus Henderson projects that debt interest costs will go up by 15% globally this year in comparison with 2021. The euro bloc is home to some of the most indebted sovereigns on the planet, but it’s also one of the most fragile.

Indebtedness in the country has actually gone up since the 2008-2012 crisis. The spiralling costs of borrowing in Ireland and Southern Europe made it impossible for the euro bloc to survive.

“If the rates rose sharply and lasted longer than they did, it is possible that we would be faced with Euro Crisis 2.0.” Deutsche Bank Maximilian Uleer, an investment strategist said that (ETR)

Uleer claimed that, while interest costs have declined since 2011, the ratio of gross domestic product to debt was much higher in those countries which were the most affected by the crisis of 2011.

Uleer estimates that the interest cost of Italian 10-year bonds would rise by 2.2% in next year’s Italian bond yields. This would bring its GDP to 2011, and it will be at 2011.

It has begun. The yields of seven-year Italian bonds are at 2.65%. This is well above the implicit or average interest rate that the country has paid, estimated at 2.4% by the European Commission.

It is because new government debt from now on will most likely increase interest costs.

The implied interest rate in France is 1.1%. Spanish yields, however, are very close to that rate at 2%. Pictet Asset Management observed that this was the case in 2011-2012.

There is NO SMOKING!

Despite all this, there is no imminent danger of debt sustainability.

Historical standards still show that borrowing costs are low, and that most countries have a debt maturity of approximately seven years. This will protect them from any near-term yield rises.

Spain, for example, needs to refinance 15% of its debt in the current year. A Spanish Treasury official said to Reuters that this was due to the “deep marks” left by the crisis. He also stated that debt portfolios had been modified, such as increasing maturity dates.

Even for Italy, the direct fiscal cost of rising rates “looks manageable” according to S&P Global (NYSE:) European sovereign analyst Frank Gill.

Gill observed that Italy prefinanced between January and April two-thirds its maximum net full-year borrowing goal of 80 billion euro and with an average refinancing price of 0.544%.

He said that the greater risk was higher interest rates dragging down growth.

SLOWING Growth, Rising Yields

Due to growth concerns, the rising cost of debt is particularly worrying. However, the International Monetary Fund expects the euro-area economy will grow by only 2.8% in 2018, compared with a 3.9% forecast.

Pictet Wealth Management Fixed Income strategist Laureline RenaudChatelain stated that “we need growth.” It’s a concern that the ECB will raise rates in a situation where growth has slowed down, which is a little worrying.

The cost to insure against debt defaults in Italy, Spain, and Portugal has risen because of unease. It is now at its highest level since November 2020 on the credit default swaps marketplace.

Particular attention is given to Italy and Greece with their respective debt-to GDP ratios of 150% & 200%, respectively (up from 120% and 175% in 2011),

Jim Leaviss, chief investment officer at M&G Investments for public fixed income, highlights as crucial the 3% level on Italian 10-year yields, breached recently for the first time since 2018.

Leaviss explained that “if yields remain above 3%, you can expect Italy’s debt burdens to begin rising.”

Goldman Sachs (NYSE 🙂 calculates that an increase of 50 basis points in yields from the current level would place Italy’s debt/GDP ratio on a rise from 2025.

Scope Ratings’ economist Dennis Shen stated that 10-year Greek yields are above 3%, more than twice the 1.6% average debt cost estimated for 2022.

Shen said that this means that the average cost to service outstanding Greek debt has increased rather than decreased over the years.