The ECB's money taps are closing, and eurozone borrowers will feel the effects
Summary
- The ECB has significantly reduced its bond holdings by almost 1,000 BEUR, ceasing all PSPP reinvestments, which has led to a steady decrease in its portfolio.
- Eurozone government debt is projected to exceed 90% of GDP, with a record 1,350 BEUR in bond issuance expected in 2026, driven by increased spending needs.
- The bond market is experiencing rising long-term interest rates, with Germany's real interest rate reaching around 1% and the 10-year nominal rate exceeding 3%.
- Interest rate differentials to Germany have decreased, suggesting a reduced likelihood of political or economic instability within the eurozone.
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Automatic translation: Originally published in Finnish 18/08/2026, 04:58 GMT. Give feedback here.
In Monday's macro review, I discussed the rise in long-term interest rates and the pressure it creates, for example, in the United States. The interest rate market is also tightening rapidly in the eurozone, where the ECB has been closing its money taps for some time now.
The ECB's bond holdings have decreased by almost 1,000 BEUR and amounted to EUR 1.9 trillion at the end of July. This revision is due to the central bank's decision in July 2023 to cease all PSPP reinvestments. As a result, the portfolio will steadily decrease as bonds mature, and no new purchases will be made.
ECB's PSPP bond holdings, MEUR
Source: Bloomberg
At the same time, eurozone member states are taking on more debt than ever before. The amount of government debt relative to GDP is estimated to rise to over 90% (it was 88.9% at the end of Q1). Unicredit, in turn, estimates that 2026 will be a record year for government bond issuance: borrowers are expected to issue 1,350 BEUR worth of bonds, which is 100 BEUR more than last year. There is plenty to finance, from growing defense spending to maintaining basic services in countries with aging populations. Thus, spending pressure will not ease in the coming years unless economic growth generates an increase in tax revenue.
Thus, two changes are visible in the eurozone bond market: one large buyer has disappeared, and at the same time, there is sufficient supply. This has led to increasing required returns among investors and has been reflected in the rise of long-term interest rates: even in Germany, the real interest rate has risen from clearly negative figures in 2022 to around one percent, and the 10-year nominal interest rate to over 3%. The era of zero interest rates is therefore truly over in the bond market. On the positive side, interest rate differentials to Germany, considered a safe haven, have narrowed. This suggests that the probabilities of new "political or economic fires" within the eurozone have at least somewhat decreased.
10-year bond rates in the eurozone, %
Interest rate differential to the German 10-year bond, basis points
Source: LSEG
