Blog post

Despite lower yields, euro-periphery is not yet out of the woods

Do these undoubtedly benign developments suggest that the three euro-periphery countries have reached a sound and robust fiscal situation? Unfortunate

Publishing date
18 June 2014

Following Ireland, Portugal has also exited its financial assistance programme in a clean way, namely without any follow-up credit line. Greece has successfully issued €3 billion 5-year maturity bonds in April 2014 at a yield of 4.95 percent and the issuance was largely oversubscribed. Even the 10-year government bond yields have declined significantly in the three countries and are now at a level close to, or even below, the 2008-09 yields (Figure 1).

Figure 1: 10-year government bond yields, 2 January 2008 – 11 June 2014

Source: Datastream.


Do these undoubtedly benign developments suggest that the three euro-periphery countries have reached a sound and robust fiscal situation? Unfortunately, the answer is no, as we conclude in our working paper published today, which assesses public debt dynamics by updating the February 2014 debt simulations done in Darvas, Sapir and Wolff (2014).

On the one hand, our findings continue to suggest that the public debt ratio is set to decline in all three countries under the maintained assumptions and in fact their future levels are now projected to be slightly lower than in our February simulations (eg for 2020 our new results are 2-3 percent of GDP lower). But on the other hand, the debt trajectories remain highly vulnerable to negative growth, primary balance and interest rate shocks, especially in Greece and Portugal, though also in Ireland.

For example, if nominal GDP growth turned out to be 1 percentage points lower than in our baseline scenario (either due to weaker real growth or lower inflation), Greek public debt would still be 133% of GDP in 2020 and 113% in 2030, the Portuguese debt ratio would be 119% in 2020 and 106% in 2030, while the Irish debt ratio would be 107% in 2020 and 87% in 2030. The sensitivity to a 1 percentage point of GDP lower primary budget surplus and to a 1 percentage higher interest rate is similar, as indicated in the three panels of Figure 2.

Under the combined shock of 1 percentage point slower growth, 1 percent of GDP smaller primary budget surplus, 1 percentage point higher interest rate and 5% of GDP additional bank recapitalisation of the banking sector by the government (which is not an extreme scenario), the debt ratio would explode in Greece and Portugal and stabilise at a high level in Ireland (Figure 2).

Furthermore, we highlight that our goal with the debt simulation was not the calculation of a baseline scenario which best corresponds to our views, but to set-up a baseline scenario which broadly corresponds to official assumptions of the IMF and the European Commission and current market views and to assess its sensitivity to deviations from these assumptions.

We think that today’s markets may be overly optimistic, while meeting the IMF projections for primary balance will remain a challenge when there is an austerity-fatigue in most periphery countries. Also, the weak euro-area growth and too-low inflation do not favour debt sustainability of the euro-periphery.

Therefore, the expected steady decline in debt/GDP ratios under our baseline scenarios should be assessed cautiously because of both the uncertainty surrounding the baseline and its sensitivity to negative developments.

Figure 2: Debt ratio scenarios (% GDP)

A: Greece

Source: author's calculations


B: Ireland

Source: author's calculations


C: Portugal

Source: author's calculations



About the authors

  • Zsolt Darvas

    Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also a Senior Research Fellow at the Corvinus University of Budapest.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

  • Pia Hüttl

    Pia Hüttl is an Austrian citizen and joined Bruegel as an Affiliate Fellow in 2015. Her research interests include macroeconomics, financial economics and monetary policy as well as European political economy.

    Prior to this, Pia worked as Research Assistant for Bruegel, and as a Trainee in the Monetary Policy Division of the European Central Bank. Also, she worked as a Blue Book Stagiaire in the Monetary policy, Exchange rate policy of the euro area, ERM II and Euro adoption Unit in DG Ecfin of the European Commission.

    She holds a Bachelor's degree in European Economics and a Master's degree in International Economics from the University of Rome Tor Vergata. She also obtained a Master's degree in European Political Economy from the London School of Economics, with a thesis on Current Account imbalances in the Euro area and the role of financial integration.

    Pia is currently pursuing a PhD in Economics at the Humboldt University in Berlin.

    She is fluent in German, Italian and English, and has good notions of French.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

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