European Debt-Crisis Risks Have Risen Sharply, Bundesbanker Says

(Bloomberg) — Europe’s most recent bond selloff is a “clear warning sign” that investors are getting nervous about governments’ efforts to rein in debt, according to one of Germany’s top central bankers.

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“Current developments — you mentioned France, but we’re also looking at the US — show that fiscal and political uncertainty can affect government bond markets,” Bundesbank Executive Board member Michael Theurer said in an interview with Deutschlandfunk. “There is currently no systemic sovereign debt crisis, but the risks have increased significantly.”

France has been hit by a rout in bond markets as concerns mount over its political and economic challenges. The turmoil has spread to other heavily indebted euro-area nations, fueling speculation that the European Central Bank may eventually have to intervene to contain the fallout.

Theurer argued that decision makers in France and across the euro zone seem to be “well aware of what is at stake.”

French Finance Minister Roland Lescure’s budget envisages €43 billion ($48.2 billion) in measures to bring down the deficit and appease investors. In Italy, the government pared back defense spending in a late change to its budget as it seeks to narrow the shortfall.

“Now is not the right time to discuss the ECB,” said Theurer. “We see no signs of a fundamentally unsustainable trend in the financial markets that could justify ECB intervention.”

He reiterated an appeal made this week by Kristalina Georgieva, the International Monetary Fund’s managing director, for governments to act urgently to address challenges including record debt piles. Increased spending following the Covid-19 pandemic and the wars in Ukraine and the Middle East have pushed some nations “out of the safe zone,” she said in a Bloomberg Television interview.

Just like the IMF, then Bundesbank has also called for a medium-term strategy that scrutinizes expenditures and focuses spending on growth-promoting investments.

“This is precisely the recommendation of the Bundesbank,” Theurer said. “Germany is in a significantly better fiscal position than other countries in Europe and around the world, but we, too, have rising debt and should therefore urgently move toward fiscal consolidation.”