EU’s indebted states could ill afford yield surge, watchdog says

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The European Union’s most indebted governments could ill afford a surge in yields after borrowing massively to finance their response to the coronavirus pandemic, the EU’s financial watchdog said this week.

EU governments have gone on a spending splurge since the start of the outbreak, further increasing debt piles that already surpassed a year’s worth of economic output before the start of the pandemic in a handful of countries such as Italy and Greece.

The European Systemic Risk Board (ESRB) warned that a further rise in U.S. bond yields could drag up borrowing costs on the other side of the Atlantic, curbing the economic recovery and spelling trouble for debt-laden sovereigns.

“Spillover effects from a further rise in long-term US sovereign bond yields could weigh on EU economic activity if the steepening of the yield curve were to perceptibly precede the economic recovery in the EU,” the ESRB said in its annual report.

“A perceptibly-stronger-than-currently-observed rise in European sovereign bond yields could have an adverse impact on debt dynamics, most notably in countries that already entered the COVID-19 crisis with an elevated debt burden,” it added.

Founded in the wake of the last financial crisis, the ESRB identifies the biggest financial risks facing the bloc and makes recommendations to authorities, although these are not binding.

It is hosted by the European Central Bank and headed by ECB President Christine Lagarde, who will present the report to the EU Parliament on Thursday.

The ECB has sought to keep a lid on euro zone government bond yields via massive purchases but voices calling for tapering that buying are growing louder as the pandemic fades.