Putting numbers on the defence borrowing hole

The spectre of European countries needing to massively increase spending on defence has haunted the capital markets ever since it became clear that US president Donald Trump was really thinking of drastically weakening US military support to Europe.

It had already triggered a sell-off in European government bonds. But this week a vague expectation got some concrete numbers. Germany’s CDU, likely to lead the next government, has turned 180° and struck a deal with the SPD to make huge exceptions to the constitutional debt brake, including €500bn for infrastructure.

Germany’s 10 year bond yield made its biggest leap for decades on Wednesday, but then stabilised, suggesting the market now knows how big the issue is and can digest it.

Meanwhile the EU has also got on the front foot, announcing an €800bn ReArm Europe plan including €150bn of new joint borrowing.

We explore the results for the supranational, sovereign and agency bond market and for central and east European governments, where the security and fiscal concerns are keenest.