ECB warns euro states on short-dated debt


Euro zone governments face increased risks of running into refinancing problems by issuing more and more short-dated debt, the European Central Bank warned today.

In its latest monthly bulletin, the ECB said a sharp increase in government borrowing over the last three years was accompanied by a fall in the average maturity of debt on issue - exposing governments to potential problems when it came to rolling over debt under uncertain market conditions.

About a third of the €6 trillion government bond market was made up of debt maturing within two years, and about 20 per cent would expire within 12 months.

Between mid-2008 and mid-2009, the share of new borrowing with a maturity of less than one year had doubled to 12 per cent, the ECB said, possibly due to governments seeking to take advantage of lower short-term interest rates.

"While potentially reducing governments' current borrowing costs, increased reliance on short-term borrowing exposes governments to greater refinancing risk, which, if taken beyond a certain level, may not be in the broader interests of macroeconomic and financial stability," the ECB said.

"The larger the stock of short-term and variable interest rate debt, the higher the sensitivity of government interest expenditure with respect to changes in monetary policy rates.

"A larger share of short-term and variable interest rate government debt may therefore contribute to tensions in public finances at a time when an exit from an expansionary orientation of monetary policy may become necessary."

The ECB has held benchmark interest rates at a record of 1 per cent for a year, and economists see no increase until the first quarter of 2011.

The ECB said that in 2010, euro area governments' borrowing was likely to amount to about 26 per cent of euro area gross domestic product, from around 15 per cent in 2007 and 17 per cent in 2008.