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How rate increases could impact debt ratios in the euro area’s most-indebted countries

How rate increases could impact debt ratios in the euro area’s most-indebted countries

Debt-to-GDP ratios should continue to fall in euro-area countries despite rising interest rates, post 2023 the situation might vary across countries. Spreads versus German yields for the euro-area countries with the highest debt-to-GDP ratios have increased significantly since September 2021. Even if spreads are not yet at the worrying levels of previous stress episodes (and have decreased since the European Central Bank’s 15 June announcement that it is finally working on a new fragmentation tool), this increase could still represent a risk at a time when growth is slowing quickly because of the energy crisis caused by Russia’s invasion of Ukraine, and when many countries have historically high levels of debt after the highly expansive fiscal policy put in place during the COVID-19 crisis.[…]