Regulators say EU debtor countries cannot afford to soar in yields

FRANKFURT (Reuters)-The European Union’s financial regulator said on Thursday that after funding the coronavirus pandemic, the EU’s most indebted government may not be able to withstand a surge in yields.

Since the outbreak of the epidemic, EU governments have been squandering expenditures, further increasing the debt accumulation of a few countries, such as Italy and Greece, that had exceeded one year’s economic output before the outbreak.

The European Systemic Risk Board (ESRB) warned that a further rise in US bond yields may drag down borrowing costs across the Atlantic, curb economic recovery and cause trouble for sovereign countries with heavy debts.

ESRB stated in its annual report: “If the steepness of the yield curve clearly precedes the recovery of the European Union’s economy, the spillover effect of a further increase in the yield of US long-term sovereign bonds may put pressure on EU economic activities.”

“European sovereign bond yields are significantly stronger than the currently observed rise may have an adverse impact on debt dynamics, especially in countries that have entered the COVID-19 crisis and have increased debt burdens,” it added.

ESRB was established after the last financial crisis, determined the biggest financial risks faced by the EU and made recommendations to the authorities, although these recommendations are not binding.

It is hosted by the European Central Bank and led by the President of the European Central Bank, Christine Lagarde, who will submit a report to the European Parliament on Thursday.

The European Central Bank is trying to limit the yields of euro area government bonds through large-scale purchases, but as the pandemic subsides, calls for reductions in purchases have grown louder.