Bonds: Bundesbanker Theurer sees sharply increased risks of a debt crisis in Europe

Dusseldorf. Michael Theurer, member of the Bundesbank's board of directors, warns of the risks of a European sovereign debt crisis. He sees the recent bond sell-off in Europe as a “clear warning signal” that investors are becoming nervous.

“The current developments – you mentioned France, but we are also watching the USA – show that fiscal and political uncertainties can influence the markets for government bonds,” said Theurer in an interview with Deutschlandfunk. “There is currently no systemic sovereign debt crisis, but the risks have increased significantly.”

In France there was a collapse in the bond markets due to political and economic difficulties. The turmoil has spread to other heavily indebted euro zone countries - fueling speculation that the European Central Bank (ECB) may intervene.

Decision-makers in France and across the eurozone are apparently “very aware of what is at stake,” said Theurer. French Finance Minister Roland Lescure's budget plan includes 43 billion euros in measures to reduce the deficit and reassure investors. In Italy, the government cut defense spending in a last-minute change to its budget to reduce the deficit.

However, it is too early for the European Central Bank to intervene. “Currently is not the right time to talk about the ECB,” said Theurer. “We see no signs of fundamentally unsustainable developments on the financial markets that could justify intervention by the ECB.”

Theurer, however, supports the appeal made by Kristalina Georgieva, Director of the International Monetary Fund (IMF), to the governments concerned this week. They need to take urgent measures to tackle the record debt. Increased spending resulting from the Covid-19 pandemic and wars in Ukraine and the Middle East have pushed some countries "out of the safe zone," she said in an interview with Bloomberg.

Like the IMF, the Bundesbank is also calling for a medium-term strategy in which spending is examined more closely and the focus is on investments that promote growth. “That is exactly what the Bundesbank recommends,” said Theurer. “Germany is in a significantly better fiscal situation than other countries in Europe and around the world, but we also have rising debts and should therefore urgently work towards fiscal consolidation.”