New public debt crisis in Europe

S&P Global warns of a new vicious circle between public debt and banking in the EU.

Europe could fall back into a vicious circle between public debt and banks if the crisis unleashed by the coronavirus affects the purchase of sovereign bonds by credit institutions, the rating agency S&P Global said on Monday.

S&P said that the link of European banks with sovereign debt – derived from the purchase of bonds issued by the states in which the credit institutions are based – has increased by 210,000 million euros (247,760 million dollars) since beginning of the pandemic.

“Despite the efforts of the States to increase the risk sharing of the fiscal cost of the pandemic, we have seen little effort on the part of European banking entities,” S&P noted.

“On the contrary, these entities have dedicated themselves to concentrating more risk in their respective countries of origin through the purchase of more national debt,” the agency added.

In Europe, the amount of national sovereign debt held by the banks of the corresponding country varies widely from one nation to another, S&P added.

In countries like Germany and France it typically ranges from 5% to 10% of total private sector loans. However, for many other economies, such as Spain and Portugal, the proportion is closer to 20%, while in some Central and Eastern European countries that proportion is 50%, the agency noted.

This vicious circle was at the center of the euro zone debt crisis, when credit institutions had huge amounts of debt from their home states.

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