High Demand for European Debt: An Elevator to Hell

I have written previously about the European Union’s debt load. It is massive. Yet, the demand from investors to obtain a piece of the action has been quite impressive. The same can be said about the European Central Bank (ECB).  Here is what the FT reported:

“Spain attracted more than €130bn of orders for a 10-year syndication in January, the second record deal in 12 months. In February, an Italian 10-year sale drew €108bn in orders, breaking a record set last summer. Former bailout recipient Greece has also drawn a crowd with new 30-year debt — its first since the financial crisis.”

And this is what the FT said about the ECB’s actions:

"Private-sector demand for eurozone government debt is backed by a vast bond-buying programme from the European Central Bank, which is seeking to shore up financial conditions and an economy hobbled by the shock of coronavirus. Since last March, the central bank’s emergency Covid-19 bond-buying programme has absorbed more than €760bn in public sector debt, buying after it is issued in the secondary market."

This is both an implicit and explicit support of debt markets by the ECB. In the old days this would be called “debt monetization”, which is the action of the Government issuing debt and then immediately after the Central Bank buying it with printed money. The expected result would be inflation. But now we are told that no such thing can happen. However, it would be unwise to accept that belief because, in the words of Milton Friedman, inflation always and everywhere is a monetary phenomenon. 

Bid-to-cover ratio

This ratio gives you a sense of demand. It is defined as the ratio of the number of bids received in a government debt auction compared to the number of accepted bids. As you can see, the demand has been quite robust.