10. Juli 2012

The countries on the periphery of the eurozone are complaining at present about heavier interest rate burdens. After having fallen in relation to gross domestic product (GDP) in much of the euro area between 2008 and 2010, interest expenditures started to increase again last year. This is primarily due to an increase in the yields of newly issued government bonds and to the volume of sovereign debt outstanding.

Under these circumstances, the financial markets are again wondering whether countries at risk will be able to finance their interest payments in the long run. Mario Monti, Italy's prime minister, in particular appears to be worried about whether his country can continue to service its rising interest burden. After Greece, Italy has the second-highest level of interest expenditure in the eurozone at 4.8% of GDP. This equals 10.4% of the Italian government's revenues. A look at the past 20 years reveals, however, that Italy is currently spending a relatively small share of its GDP on interest payments. The average paid between 1990 and 2000 (10% of GDP) was more than twice as high as in 2011. Since Italy rejoined the European Monetary System in 1996 it has benefited to a large extent from the convergence of government bond yields – much as other countries have as well.

In some countries, however, the fall in interest expenditure in the years leading up to the financial crisis is explained not only by yield convergence, but also by an absolute decline in total government debt during the same period. For example, Spain's sovereign debt shrank from 68% to 36% of GDP between 1996 and 2007. One remarkable exception to be noted in this context, however, is Greece. Relative to GDP, the Greek government's interest expenditure more than halved between 1995 and 2007 on account of falling yields, even though its deficit steadily increased.

Finally, it ought to be mentioned that Spain only had to expend 2.4% of GDP on interest payments in 2011 despite the fact that 10-year government bond yields exceeded 6%. While this does represent an increase on the 2010 reading, it is still lower than the expenditures posted by Germany and France, which each had to expend 2.6% of GDP to fund their interest payments in 2011.