Spillover effects of debt issuance and the importance of fiscal rules | European Stability Mechanism

Spillover effects of debt issuance and the importance of fiscal rules | European Stability Mechanism

Effetti di ricaduta dell’emissione di debito e importanza delle regole fiscali

 

Debt issuance in major euro area countries whose bonds are considered relatively safe drives up interest rates in both the issuing country and in other ‘safe’ countries. 

This new type of spillover, which differs from the contagion effects and default risk spillovers that took centre stage during the euro sovereign debt crisis, implies that total debt issued in ‘safe’ countries matters more for sovereign interest rates than which country issues it. 

This insight strengthens the case for common fiscal rules, not only to preserve low interest rates and debt sustainability and safeguard euro area financial stability – the core mandate of the European Stability Mechanism (ESM) – but also to ensure the fair sharing of fiscal burdens in non-crisis times. (...)