The 31 developed market sovereigns we rate in Europe will likely issue $1.84 trillion of gross long-term commercial debt during 2024. This is slightly higher than last year's gross borrowing of $1.79 trillion, though comfortably below issuance during the years of the pandemic. The increase primarily reflects our forecast of a weaker U.S. dollar. In net terms, the difference between borrowing requirements in 2024 and 2023 is marginal.

Only three small borrowers--Cyprus, Ireland, and Switzerland--are set to reduce the absolute amount of debt, reflecting their budgetary surpluses.   Countries with small capital markets tend to be more conservative borrowers. The exception is Malta, whose net commercial borrowing will likely reach 6.2% of GDP in 2024, albeit its net debt, at 42% of GDP, is well below the euro-area average.

The three sovereigns with the highest debt in absolute terms, are among the top four net borrowers as a percentage of GDP.   These are (in descending order) Italy at 5.4% of GDP, the U.K. at 5.2% of GDP, and France at 4.8% of GDP. Since the pandemic, the divergence between borrowing requirements between large and small countries has become more marked.

Net Issuance Is Down Slightly As Governments Gradually Consolidate

We project net long-term commercial borrowing for the European sovereigns covered in this report at 3.1% of GDP, versus 3.3% of GDP last year. This as governments shift only very gradually toward budgetary consolidation. One of the factors slowing down budgetary tightening is the higher cost of debt, albeit increased market refinancing costs from 2023 are working their way only slowly into the fiscus. That said, European government yields have dropped significantly over the last 12 months, led by Italian bonds, where the 10-year yield is 55 basis points (bps) below the level at this time in 2023. Only U.K. yields have increased on fixed-rate debt, by 47 bps on a year-over-year basis on the 10-year gilt.

Nevertheless, the average cost of servicing total debt is notably higher this year than before quantitative tightening began. For 2024, we project the U.K. will spend 1 percentage point (ppt) of GDP more on interest payments than in 2019. This is the highest amount of interest the U.K. has paid for over two decades, with the exception of 2022, when high inflation pushed up the servicing costs of index-linked gilts. Similarly, we project that Italy will pay 0.8 ppts more on interest as a share of GDP this year compared to 2019, with total interest payments equivalent to 4.2% of GDP (about the same amount that Italy paid in 2015). Nevertheless, demand for European government debt remains solid as market participants--including households--replace central banks as key investors, attracted by more generous yields.

Crucially, we also expect the European Central Bank (ECB) will, until the end of 2024, continue to reinvest redemptions of the €1.7 trillion of bonds purchased under the PEPP (pandemic emergency purchase program), launched in March 2020. The ECB can reinvest these funds flexibly, meaning that it could choose to support a particular euro-area sovereign government's debt prices, should it feel risks of financial fragmentation are rising. We still believe the ECB will only stop reinvesting PEPP redemptions should it feel confident that underlying market conditions allow for sustainable yields for all EU member states.

Nevertheless, at some point, perhaps in 2025, the size of total holdings under PEPP will be slowly wound down as they come due, implying a larger amount of the ECB's government instruments will need to be refinanced in the market. That will put a floor under yields, regardless of inflation dynamics, and likely lead to a higher average cost of debt for euro-area governments, alongside constant pressure to consolidate fiscal policy further.

Commercial Debt Refinancing Will Be High On The Agenda

According to our projections, the total commercial general government debt on developed European sovereigns' books could reach 68% of GDP by the end of this year, up slightly from 66% in 2023. This year's estimate is much lower than the peak of 80% of GDP in 2020, but still well above pre-pandemic levels (63% of GDP in 2019). Reflecting this higher borrowing, the amount of debt European developed sovereigns need to refinance this year will hit a new high of $1.14 trillion (though this figure is also influenced by a softer dollar).

The good news is that the dreaded adjustment to a post-quantitative-easing market is largely behind us. Governments are paying more on average to roll over expiring debt, but pressure to raise market rates has subsided, since most global central banks have paused monetary tightening. European Treasuries continue to pre-finance, with more than 25% of full-year borrowing executed as of mid-February on average, and they have generally comfortable liquidity positions.

New instruments, in particular savings products geared toward households, should continue contributing to a few governments' funding. This is the case, most notably, in Italy, where households' demand for longer-term savings products remains robust. As of year-end 2023, "other resident holdings" had increased, compared with year-end 2021, by 5.5 ppts to 13.4% of total outstanding Italian government securities, according to data from the Banca d'Italia. For all other categories of creditors, the share of government securities holdings declined.

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Appendix: Data Sources

Our estimates focus on debt issued by a central government in its own name and exclude local government and social security debt, as well as debt issued by other public bodies and government-guaranteed obligations. In terms of commercial debt instruments, our estimates for long-term borrowing include bonds that have maturities of more than one year, either issued on publicly listed markets or sold as private placements, as well as commercial bank loans.

In addition to commercial debt, some of the estimates we use in this report include official debt. We do not include government debt that central banks may issue for monetary policy purposes in some countries. All reported forecast figures are our own estimates and do not necessarily reflect the issuers' projections. Our estimates are informed by our expectations regarding central government deficits, our assessment of governments' potential extra budgetary funding needs, and our estimates of debt maturities in 2023. Estimates that we express in dollars are subject to exchange-rate variations.

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Related Research

• Sovereign Debt 2024: Borrowing Will Hit New Post-Pandemic Highs, Feb. 27, 2024
• Sovereign Debt 2023: Borrowing Will Stay Elevated Despite Rising Cost Of Debt, March 9, 2023