Aging Population Undermines Longer-Maturity Bonds: Euro Credit
The euro-region’s ability to grow its way out of the debt crisis faces a roadblock -- an aging population.
While Italian Prime Minister Mario Monti and his Spanish and French counterparts push for measures to spur an economic expansion, Italy’s structural dependency ratio exceeds 50 percent. In other words, the number of working-age people is less than half the total population. The government forecasts the ratio will reach 63 percent in 2030 and 83 percent by 2065.
Aging and shrinking labor pools are adding to budget woes in the region where the unemployment rate is already at a record high. The risk is that without an overhaul of benefit programs, governments will be unable to balance their books as tax revenues shrink and unfunded pension and health-care liabilities balloon. Longer-maturity bonds in Spain, Portugal and Greece are underperforming their shorter-dated counterparts amid concern the nations’ finances will keep deteriorating.
“You just can’t create growth out of thin air and the demographic trend in the euro zone isn’t conducive to growth,” said Humayun Shahryar, who helps oversee $100 million as chief executive officer at Auvest Capital Management Ltd. in Nicosia, Cyprus. “For a long time, the economic expansion in the region was fueled by low borrowing costs that came with the monetary union. That’s no longer the case and the shrinking working-age population is a problem.”
The extra yield investors demand to hold 30-year Italian bonds instead of similar-maturity German securities was 388 basis points at 2:14 p.m. in London, up from 119 three years ago. The average over the past 10 years is 95 basis points, or 0.95 percentage point.
The proportion of people older than 65 in Europe will rise to 19 percent in 2020 from 16.6 percent this year, according to projections from the U.S. Census Bureau. Only Japan’s ratio is higher, at 23.9 percent for 2012, hampering its efforts to shake off two decades of stagnation.
In Spain, where the unemployment rate of 24.6 percent is the highest in the European Union, the government is paying about 7 billion euros ($8.70 billion) a month to retirees, up from 3.84 billion euros in 2000. The ratio of workers paying into the system per retiree has fallen to 2.43, the lowest since 2003, Deputy Social Security Minister Tomas Burgos said June 5.
Spanish bonds with maturities of 10 years or longer handed investors a 7.1 percent loss this year, while securities due in one to five years dropped 0.7 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
The proportion of people aged 65 or older in Greece will climb to 26.7 percent in 20 years from 20.8 percent in 2012, according to Global Demographics Ltd., a Hong Kong-based research company. The figure for under 25 years will drop to 23.6 percent from 25.1 percent.
Greece’s ratio of debt to gross domestic product will increase to 168 percent next year from 161 percent this year, the European Commission said in report on May 11.
“That doesn’t even include unfunded liabilities which could probably take it close to 800 percent of GDP,” said Stuart Thomson, who helps oversee about $115 billion as a money manager at Ignis Asset Management in Glasgow. “Governments try their best to ignore demographics because it’s outside their term of office, but it’s a very important factor for an investor like myself. Bond yields in troubled nations will stay elevated for a long time, and we don’t own them.”
The euro-area jobless rate rose to 11.1 percent in May, the highest since the data series began in 1995, the European Union’s statistics office said on July 2.
The debt crisis and budget cuts have resulted in an economic slump that sent the region’s business confidence to the lowest in more than two years in June. Companies, including Deutsche Lufthansa AG, PSA Peugeot Citroen and Spanish news agency Efe, are seeking to trim jobs to meet weakening demand.
“There is a big challenge ahead, and the deteriorating economic outlook will make it harder to fix the problem,” said Pavan Wadhwa, global head of interest-rate strategy at JPMorgan Chase & Co. in London. “Peripheral countries need to be committed to reforms and austerity programs to bring debt to sustainable levels in order to win investor confidence.”
The European Central Bank will cut its benchmark interest rate to a record 0.75 percent tomorrow, according to a Bloomberg News survey of 62 economists. Five predicted a reduction of 50 basis point and 11 saw no change.
Spanish and Italian bond yields dropped the most this year on June 29 after EU leaders meeting in Brussels agreed to loosen bailout rules, move toward a banking union and break the link between sovereign and banking debt through the direct recapitalization of lenders.
Spain’s 10-year yield fell 61 basis points to 6.33 percent on June 29 and was at 6.37 percent today, still above its 10- year average of 4.30 percent. Italy’s 10-year bond yield is 5.76 percent, versus the decade-long average of 4.42 percent.
The International Monetary Fund recommended June 21 that euro-area nations issue common debt, saying the crisis was at a “critical” stage. EU President Herman Van Rompuy proposed a plan that centers on common banking supervision and deposit insurance, along with a phased move toward joint debt issuance. German Chancellor Angela Merkel remains opposed to debt sharing.
The risk is Europe’s debt problem is so structural and fundamental that these measures won’t solve it unless leaders address the demographic shift, said Auvest’s Shahryar, who prefers investing in countries with both population and productivity growth such as the U.S., Australia and Canada.
“In Europe, we have come to a point where neither households nor governments can create much more debt,” he said. “Euro bonds aren’t going to make the population younger. They aren’t going to create jobs. They just allow some countries to borrow more. Europe needs to think of a new model of growth.”
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