ANNUAL REPORT 2008 - Polymer Bank Notes of the World

Table B Structure of amounts outstanding of debt securities issued by euro area governments(percentages of total debt securities issued by general government; end of period)1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Central government 96.9 96.7 96.3 95.5 94.7 94.3 93.8 93.4 93.2 93.5Long-term securities 89.3 89.8 89.0 87.3 85.9 85.8 86.0 86.5 86.1 82.7Short-term securities 7.6 6.9 7.2 8.2 8.9 8.5 7.8 6.8 7.1 10.8Other general government 3.1 3.3 3.7 4.5 5.3 5.7 6.2 6.6 6.8 6.5Long-term securities 3.0 3.2 3.6 4.4 5.2 5.6 6.0 6.4 6.4 6.0Short-term securities 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.4 0.5Total general governmentLong-term 92.3 93.0 92.6 91.7 91.0 91.4 92.1 92.9 92.5 88.7Fixed rate 79.2 81.1 82.5 82.1 82.2 82.7 83.2 84.0 83.3 79.9Floating rate 10.6 10.0 8.8 8.1 7.5 7.6 7.9 8.0 8.2 7.8Short-term 7.7 7.0 7.4 8.3 9.0 8.6 7.9 7.1 7.5 11.3Total general governmentin EUR billions 3,453.4 3,549.1 3,775.5 3,949.4 4,151.7 4,386.7 4,604.8 4,706.6 4,836.7 5,239.6Source: ECB.Chart A breaks down changes in interest payments into: i) an effect stemming fromchanges in government debt, ii) an effect resulting from changes in interest rates andiii) a residual cross effect. 3 Interest expenditure increased by around 0.2 percentage point of GDPin 2008. This was mostly a reflection of the increase in the level of debt, whereas the impact ofthe decline in interest rates and cross effects was marginal.Following the developments triggered by the onset of the financial turmoil in August 2007, thespreads between the yields on long-term euro area government bonds and those on German bondswidened significantly in 2008, particularly over the second half of the year. This is illustratedin Chart B, which shows the spreads against Germany for eight euro area countries (Belgium,Ireland, Greece, Spain, France, Italy, the Netherlands and Portugal). The differences betweengovernment bond yields across euro area countries ultimately reflect differences in credit riskand liquidity premia.First, in response to the intensification of the financial turmoil in the second half of 2008, thesummit of euro area countries in Paris on 12 October announced coordinated rescue packages,including guarantees for bank debt, capital injections for banks and outright purchases of banks’risky assets. The expected fiscal burden of such measures may have increased the perceivedprobability of defaults on sovereign bonds. Credit risk premia increased in all euro area countries,albeit to varying degrees, as illustrated in Chart C, which shows sovereign credit default swapspreads. 4Second, for most of 2008 the changes in euro area government bond yields also reflected flightto-qualitybehaviour on the part of investors. This process was also characterised by increaseddiscrimination among investors with regard to their flight-to-quality destinations. German3 The change in the nominal interest payments, I, can be broken down as follows:Δ I = Δ B × i + Δ i × B + Δ B × Δ iEffect via{ {change indebtEffect viachange ininterest rateCross effect(residual)where B is the nominal general government debt and i is the average implicit interest rate (I/B).4 Sovereign credit default swap spreads have the advantage of not being distorted by changes in the benchmark bonds of the countriesconcerned, of not being affected by any maturity mismatches, and of tending to be more responsive to market changes.72 ECBAnnual Report2008