>SPECIAL REPORT (ECONOMIC RESEARCH)

Bail-out or no bail-out: What effect on euro-zone long-term interest rates?

We will start off from the following ideas:

1- Some euro-zone countries may be faced with a public debt crisis in the future (rise in public
indebtedness leading to a funding problem, hence a rise in interest rates and insolvency risk, or at least inability to finance expenditure);

2- If these countries enjoy the solidarity of other euro-zone countries (in one form or another: loans, joint issuance, monetisation by the ECB, etc.), their public finance problem will be "spread out" over the whole zone; different sovereign debts of euro-zone countries should then be expected to become similar, with an average level creditworthiness (tightening in spreads, negative swap spreads);

3- If the no bail-out clause remains valid, this country will either be in crisis, or find a solution outside the euro zone (IMF). We would then be in a rationale of debt differentiation (widening in spreads, with the most solid countries enjoying low interest rates);

4- It is worth noticing that, until the crisis, there was a different rationale, which was key in the mind of the euro’s creators: convergence towards the interest rates of the most solid countries (Germany) for all euro-zone countries, with the credibility of the euro-zone’s rules.

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