These countries are facing large risks of rising bond yields, just like other members of the EU bloc, like Germany and France. So, it may seem like the wise lower indebted northern EU nations will pay for the thoughtless nations of the European South with a high debt burden. This may be reminiscent of the Greek debt crisis in 2008-2010 that led to a loss of confidence in the Greek economy, and the largest bailout of the developed country ever to be seen. The Greek government required multiple bailout loans from the International Monetary Fund, the Eurogroup, and the ECB along with a 50% haircut of the debt to private banks in 2011. More or less, the country economically recovered in 2017. However, the Greek debt crisis did not only rock the European financial market, but the U.S. market also.

This time the issue is much larger as one of the largest EU economies, Italy, is nearing the same troubles. The government debt of Italy is close to $2.5 trillion compared to Greece’s peak numbers of 318 billion Euros in 2017 and roughly 200 billion Euros in the middle of 2022. Not to forget the 1.45 trillion Euros debt of Spain and over 276 billion Euros for Portugal. Any debt crisis of that kind would rock financial market to the core. And Italy, with its third world’s largest government debt market, will certainly be in the eye of this debt hurricane, becoming a major headache for the ECB.

Defining whether or not a country will be eligible for purchases will be based on what the ECB calls a "cumulative list of criteria", which includes: compliance with EU fiscal rules; absence of severe macroeconomic imbalances; fiscal sustainability as judged by bodies including the European Commission, the European Stability Mechanism and the International Monetary Fund; sound and sustainable macroeconomic policies complying with European Commission recommendations.

The ECB admitted that this TPI program could be applied to private sector securities, strengthening worries. Italy is more dependent on the gas supplies from Russia that weaponised its gas exports in order to bind Europe to its military assistance to Ukraine. Even though Italy has only imported 25% of gas from Russia so far this year, compared to 40% last year, the cutoff of these supplies may severely damage its economy, extending the damage through rising energy prices.

These risks could be eased somehow surprisingly by a possible recession in Europe and in the United States that would lower demand for energies and globally lowering crude and gas price. However, the recession would make servicing of debts even more complicated due to rising fiscal deficit and government bond yields. Thus, the introduction of this new TPI debt purchases program is almost inevitable. After all, the Italian economy was badly affected by the pandemic, and the ECB bought almost the entire net issuance of the Italian government bonds in 2020 and 2021. Italy’s 10-year benchmark bond yields rose to a month peak of 3.75% after the ECB’s announcements and then they scaled back to 3.6%, while Germany’s 10-year bond yields dropped to 1.06%.

Esperio analysts note that both Portugal and Spain have put large efforts into extending their average debt maturity over the last decade. Portugal debt average maturity rose to around seven years compared to under six years 10 years before. Spanish debt maturity was extended to over eight years compared to 6.35 years a decade ago. Italy’s debt maturity is averaging around seven years, marginally higher than in 2012. Unlike most other EU nation, with the exception of Greece, Italian GDP per capita dropped in 2021 compared to 2001. Both Spain and Portugal have increased its numbers.

Nevertheless, any debt troubles of the above-mentioned countries could agitate global financial markets, triggering a possible chain debt crisis reaction in Europe and on a global scale.

Alex Boltyan, senior analyst of Esperio company