In a recent post (here) I did analysis of the ECB historical rates in relation to eurocoin leading indicator of growth. This chart is reproduced here with suggested ranges for the repo rates consistent with current and with higher inflation.
So if the equilibrium rates are in the neighborhood of 2.25-2.75 percent, what would 1% increase in interest rates from June 2011 rate of 1.25% do to the cost of fiscal debts financing across the PIIGS?
Using IMF projections for debt levels for PIIGS through 2016 and assuming that all interest payments are financed out of deficits / borrowing, the chart below shows the extent of the increase in the cost of interest charges on government debt by 2016:
This translates into an increase in the annual cost per capita (2016 forecast) of:
- €560.48 in Greece
- €834.84 in Ireland
- €546.74 in Italy
- €309.24 in Portugal
- €319.02 in Spain
So that should put into perspective my view of today's hike in the ECB rate, expressed earlier here. So happy wrecking ball swinging, Mr Tri(pe)chet & Co.