ECB’s Stournaras: Tighter Monetary Conditions May Affect Debt Sustainability

14 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Yannis Stournaras on Sunday observed that tighter monetary conditions could result in higher sovereign borrowing costs affecting debt sustainability.

In an op-ed piece in Greek daily Kathimerini, Stournaras, who heads the Bank of Greece, wrote, ‘The tightening of monetary conditions that is already underway could slow economic growth and, more importantly, put upward pressure on borrowing costs for both the public and the private sectors and affect the sustainability of public and private debt.’

That the ECB Governing Council in its December decisions referred explicitly to Greece ‘is a strong message of confidence in the Greek economy and helps to mitigate some of these risks’, he said. The decisions support Greek sovereign debt until the achievement of investment grade, he said.

‘Moreover, the fact that Greek bonds will continue to be purchased during the PEPP reinvestment period until the end of 2024 suggests that they would also remain eligible as collateral for the Eurosystem refinancing operations over the same period’, he said.

Recently risen Greek sovereign yields are part of ‘a generalised phenomenon … largely due to the common shock of changing global financial conditions’, Stournaras said. Still, with Greek debt rated lower, their yields can be particularly susceptible to market volatility.

‘Therefore, part of the increase in the spreads of Greek government bonds (vis-à-vis comparable German bonds) is attributable to the fundamentals of the Greek economy’, he said. Though high, Greek sovereign debt ‘is resilient to various adverse macroeconomic and fiscal scenarios’, he said.

‘In particular, Greece’s debt-to-GDP ratio is stabilising and is projected to reach its pre-crisis levels earlier than the ratios of other highly indebted countries, marking the largest drop by 2030, both in the baseline and in the various alternative scenarios’, he added.