<div id="readability-page-1"><div> There is broad consensus among forecasters, economists, and analysts on this point: Europe's economy is growing more slowly than that of the US or Asia, and the gap is unlikely to narrow in the coming years, but rather widen. This could also have a negative impact on the debt sustainability of some members of the European Monetary Union, particularly those such as France that are already in poor shape. However, the credit spreads that investors demand for government bonds from countries with lax financial management compared to first-class securities remain low. How can this be explained? finews looked for answers and found them in Nicola Mai. Mai has been an economist and credit analyst at fixed income specialist Pimco (part of the German Allianz Group) in London since 2012 and now heads Sovereign Credit Research for Europe. He is responsible for formulating key macro views for the region and for identifying and analyzing investment trends. Mai began his career almost 25 years ago as an economist in the UK government, in a program run by the UK Treasury. Prior to joining PIMCO, he was senior euro area economist at J.P. Morgan for seven years. He is also considered an expert on the sovereign debt crisis that shook the eurozone from 2010 to 2012. The interview with Mai took place at Pimco's Zurich office. <hr/> Mr Mai, during the crisis 15 years ago, credit spreads were seen as the thermometer for the severely battered monetary union. Today, there is once again heated debate about the national debt and debt sustainability of some members, but this time the markets remain fairly calm, even though the economy is comparatively weak. What has changed? In macroeconomic terms, Europe does indeed face major challenges in the long term. Growth potential will decline further. Reasons for this include unfavorable demographics, high energy prices, and the lag in innovative technologies. Strong export orientation is also proving to be a stumbling block at a time of tense trade relations and growing segmentation, compounded by competition from China. In the short term, however, the picture is brighter: Germany's fiscal stimulus is boosting the economy, and the European Central Bank (ECB) has created a favorable environment with its interest rate cuts. For the government bond markets, however, another development is more important. Which one? The many advances made since the crisis in terms of coherence and the institutional framework of the eurozone: whenever stabilisation required it, politicians took action. We may not yet have full fiscal union, but integration has progressed with Next Generation EU, the post-pandemic recovery fund, and joint bonds. Confidence in fiscal coordination and cooperation has grown. In addition, the ECB has developed a toolkit of various bond-buying programmes, enabling it to act as a lender of last resort for countries if necessary. All of this has contributed to the eurozone being more stable today, which is reflected in tighter spreads and less volatility. <blockquote> «Market confidence in fiscal coordination and cooperation has grown. This is reflected in tighter spreads and less volatility.» </blockquote> So there is no need to worry about France either? It's not that simple. France has a high deficit relative to its gross domestic product (GDP) and also high levels of debt. The tax burden is already quite heavy, and there are few signs that politicians will succeed in consolidating public finances. We are therefore underweight in French government bonds. Why don't you simply rely on the ECB stepping in with its purchase programmes to stabilise the market in an emergency? If there are clear signs of stress, the ECB will ultimately intervene. But this put option is currently well out of the money, meaning that there would need to be significantly more stress in the system before it would intervene. There are currently no signs of such a serious intensification. The ECB will also not intervene early because it does not want to override market forces. If market pressure increases, this is likely to have a disciplining effect on politicians, similar to what we are seeing in the US. The US government does not want to lose control of the Treasury market either. It will therefore be careful not to seriously damage the independence of the Federal Reserve. <blockquote> «In the case of France the put option is currently well out of the money, meaning that there would need to be significantly more stress in the system before the ECB would intervene.» </blockquote> Deficit and debt as a proportion of GDP are key indicators for the Maastricht criteria, which were established in 1992 when monetary union was agreed, and later for the Stability Pact. At that time, they were set at 3 per cent and 60 per cent. Are these values still relevant for assessing debt sustainability? After the shock of the pandemic, debt in most countries is above 60 per cent. Even Germany will exceed this figure with its spending programmes, which is fine because they were underinvesting. The key thing is that debt can be stabilised, even if above 60 per cent. Important parameters for debt sustainability are the ratio of nominal interest rates to nominal GDP growth, inflation and the primary balance of the national budget, i.e. excluding interest expenditure. Until recently, economists kept finding new reasons why the real equilibrium interest rate r*, which can only be estimated, should be structurally lower than in the past. Don't the currently relatively high yields on long-term government bonds show that they were wrong? This is a critical variable that we are analysing closely. It may indeed have increased slightly. In an economy, r* balances savings and investment. We are currently experiencing an investment boom, driven by AI, defence, infrastructure and the desire for resilience and onshoring. However, demographics suggest that r* is unlikely to return to the higher level seen before the financial crisis. In the US, r* is currently likely to be around 1 per cent. However, if new technologies do indeed lead to a noticeable boost in productivity, this could also push up the equilibrium interest rate. <blockquote> «Corporate bonds are not particularly attractive overall due to the narrow spreads.» </blockquote> Let's move on to investment practice. What are the biggest competitors for European government bonds? We look at the entire universe, although currency risk must of course be taken into account. British government bonds are attractive because of their high potential for interest rate cuts, as are US Treasuries. German government bonds are less attractive at the margin given that the ECB is at, or near, the end of its cutting cycle, and due to the expected increase in bond supply. Japan is an interesting case with rising interest rates, but we are waiting to see what happens because the guidelines for future fiscal policy are still not fully clear. Corporate bonds are not particularly attractive overall due to the narrow spreads. However, there are opportunities in certain segments such as mortgage bonds and other secured bonds. Equities, on the other hand, are highly valued and therefore expensive, so we are cautious. Sure, the spreads between corporate bonds and government bonds are narrow by historical standards. But could that not be due to the fact that the credit ratings of many companies have improved while those of many countries have deteriorated? I don't really find this argument convincing. The difference between government and corporate bonds is the spread. It may well be that corporate balance sheets are fundamentally better today than they used to be. But if a government gets into a debt crisis, then all companies in that country are likely to have a big problem. In credit analysis, there is not only a link between the government and banks, but also between the government and companies. I'm not saying that there are no opportunities in corporate bonds. But the market as such is not very attractive. <blockquote> «In credit quality there is a link between the government and companies, too.» </blockquote> What does the increasing fiscal integration you mentioned, with more joint bonds, mean for investors? Is this the start of the secure European investment that has been lacking until now? And how should we assess the other bonds that have been issued for some time by EU-related institutions such as the European Stability Mechanism (ESM)? No, we are not yet at the point where we can talk about a new European safe asset. But we are on the way there, including with the Safe armament programme. The market for EU bonds has become much more liquid. However, this does not make a thorough credit analysis superfluous. Why not? Firstly, the various institutions that issue bonds have their own structural characteristics that need to be taken into account. And secondly, the bonds issued by the European Commission and the payment obligations entered into in the EU budget must also be taken into account sufficiently. The EU's debt is rising, which in itself leads to higher yields. However, this effect is currently being partially offset by improved tradability: the credit premium is rising, while the liquidity premium is falling. The joint bonds also take some pressure off the sovereigns' budgets, which is why countries such as France are so enthusiastic about them. Ultimately, however, the EU's credit quality continues to depend on the creditworthiness of its members. </div></div>

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Pimco credit analyst Nicola Mai discusses Europe's economic challenges, highlighting that growth is lagging behind the US and Asia, which may worsen debt sustainability for countries like France. Despite this, the eurozone's cohesion has improved since the financial crisis, leading to tighter credit spreads for government bonds. Mai notes that while the ECB has tools to stabilize markets, it prefers not to intervene prematurely, allowing market forces to guide fiscal discipline among politicians. He expresses caution regarding French government bonds due to high deficits and debt levels.

Nicola Mai: «We Are on the Way to a New European Safe Asset»