ECB’s Lane
The topic of the Phil Lane’s speech is “Public debt: Past lessons, future challenges” which is topical given that Germany is angling to have an election on removing the debt break. The presentation has been published and argues:
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- Sovereign spread changes have significant impact on domestic lending conditions
- Countries with weak bank capital ratios see stronger pass-through of sovereign stress
- Private sector debt and external imbalances amplify sovereign spread shocks
ECB data shows 100bp increase in sovereign spreads leads to:
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- Higher lending rates
- -0.6% hit to GDP growth
- -0.2% impact on inflation
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- Pushes for completion of Capital Markets Union and Banking Union
- Highlights massive EU investment needs in green, digital and defense sectors
- Notes EU supranational debt has increased but still seen as less liquid than AAA sovereigns
Lane is in Greece and that’s a reminder that the ECB remains concerned about fragmentation risks and monetary policy transmission. The march continues towards more integration and ultimate join issuance of debt and the United States of Europe.
The presentation also contains a reminder that public debt and deficits can rise for a long time before it falls apart, as it hasn’t yet in Japan.