Global | Sovereign risk in quarantine

Public debt levels have skyrocketed globally due to the increase in fiscal expenditure needed for public measures to fight the economic damage caused by the pandemic, and by the effects of the slump in economic activity.

Key points

• Key points:
• Normally, such strong and sudden growth in public debt also involves a considerable increase in the risk of fiscal unsustainability, especially in emerging and/or heavily indebted countries.
• However, over the past year we have seen relative stability in ratings and risk premiums that, despite initially increasing, have quickly returned to pre-COVID-19 levels, which were already quite low.
• BBVA Research estimates show that indeed, on a global level, agency ratings and default risk premiums (sovereign CDS) have reacted less aggressively than they would have in the past.
• The NGEU Recovery Fund could have a significant macroeconomic impact, due to both the magnitude of the fiscal incentive and its potential to modernize the economy.
• However, if public bailout policies are not applied properly and are ineffective, or if the recovery of economic activity takes a long time, the threat of fiscal unsustainability could indeed come to pass.

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