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Outrageous Predictions

OP 2019: EU announces a debt jubilee

Christopher Dembik
Head of Macroeconomic Research

Summary:  Unsustainable levels of public debt prompt the ECB to act in a way that isn't as unprecedented as we would like to think.

For the full list of Saxo's 2019 Outrageous Predictions, click here.


From Ancient Babylon to 1930s Europe, debt jubilees have been far more common
than most of us may realise. As demonstrated by economists Carmen Reinhart and
Ken Rogoff in their seminal work “This Time is Different: Eight Centuries of Financial
Folly”, restructuring and write-offs have also played important roles in resolving
financial crises.

Contrary to what the Greek debt tragedy seen since 2010 would suggest, debt
forgiveness has been very common in Europe. In the interwar period, jubilees swept
across Europe to the tune of 50% of GDP for France, 36% of GDP for Italy, and 24% of
GDP for the United Kingdom.

In 2019, the unsustainable level of public debt, a populist revolt, rising interest rates
from European Central Bank tapering/lower liquidity and sluggish growth reopens
the European debate on how to get ahead of a new crisis. Italy is the key bellwether
as it faces a massive maturity wall set to reach around €300 billion in refinancing
over 2019 as interest rates spike. Quickly, Italian contagion sickens Europe’s banks as
the EU lurches into recession. The ECB resorts to new TLTRO and forward guidance
to limit the carnage, but it’s not enough and when contagion spreads to France,
policymakers understand that the EU faces the abyss.

Germany and the rest of core Europe, which refuses to let the Eurozone fall apart,
have no other choice than to back monetisation. The Economic and Monetary Union
extends a debt monetisation mandate to the ECB for all debt levels over 50% of
GDP and guarantees the rest via a Eurobond scheme while moving the controversial
Growth and Stability goalposts.

A new fiscal rule allowing the first 3% of GDP in deficits to be mutualised in 2020 is
adopted by EMU countries, with everything beyond subject to a periodic review by the
European Commission linked to the state of the EU economy.

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

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Macro: It’s all about elections and keeping status quo

Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

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350x200 charu (1)

FX: The rate cut race shifts into high gear

As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

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Equities: The AI and obesity rally is defying gravity

Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

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Fixed income: Keep calm, seize the moment

With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

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Read article
  • 350x200 steen

    Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article
  • 350x200 charu (1)

    FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article
  • 350x200 peter

    Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article
  • 350x200 althea

    Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article
  • 350x200 ole

    Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article

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