Bank of America warns on Europe's surging debt

By Ambrose Evans-Pritchard
Last Updated: 10:15PM GMT 03 Dec 2008


"The situation is not pleasant for high-debt countries singled out as bad credits," said Ricardo Barbieri, the bank's European credit chief.

"The real cost of their public debt is going up. It is a little alarming, especially in the case of Italy. The next few months are going to be a period of stress that puts the sustainability of the euro in question," he said.

Bank of America said the total funding required by Europe's governments (including Britain) will rise from €755bn this year to €960bn in 2009. The crucial figure is a €282bn jump in new debt.

"This is a significant increase in supply," said Mr Barbieri. Countries such as Italy – which has seen the yield spreads on its bonds widen to 120 basis points above German Bunds – may not enjoy any benefit from the fall on bond yields worldwide as recession dampens inflation.

"There could be a vicious circle. The dynamic for high-debt countries can get a lot worse," he said.

Italy's public debt has jumped from 104pc to 107pc of GDP over the past year. France, Germany and now Spain are seeing similar rises – but from a much lower base. They do not face the imminent risk of a debt compound trap.

Mr Barbieri said Italy had brought forward some "pre-funding" with an unscheduled debt auction in November, indicating its treasury's concern about a debt glut likely to hit in the first quarter of 2009.

The corporate markets are already under stress in Europe. The iTraxx Crossover index measuring the cost of default insurance on low- to mid-grade company bonds smashed through the once unthinkable level of 1,000.

Holger Schmieding, Bank of America's Europe economist, said it is now clear that the eurozone is in a "downward spiral".

The PMI confidence indexes that have proved reliable in the past are pointing to a year-on-year decline in GDP of 2.7pc by early 2009.

"Fortunately we have a very aggressive policy response in the world, so we are not going into depression," he said.

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