<blockquote>
<p>My question: Is this because the interest rate on old debt will increase?</p>
</blockquote>
<p>Generally, not. Most government bonds have fixed coupon they pay. For example 1000e government bond might pay 10e coupon. The value of coupon is constant it does not change with interest rates.</p>
<p>Interest rates determine how much the bond can be sold for in the market the bond price is given by:</p>
<p><span class="math-container">$$P= \frac{C}{i}\left(1-\frac{1}{(1+i)^n} \right) + \frac{FV}{(1+i)^n} $$</span></p>
<p>where <span class="math-container">$P$</span> is the price, <span class="math-container">$C$</span> value of fixed coupon bond pays, <span class="math-container">$i$</span> interest rate, <span class="math-container">$n$</span> number of time periods until debt has to be repaid and <span class="math-container">$FV$</span> face value on bond.</p>
<p>Higher interest rate means bond price falls. The fall in price of old bonds does not matter for government, but government must constantly roll over its debt. Ten years ago government might have issued some ten year bonds that now have to be covered by issuing new ten year bonds. Government debts are continuously being rolled over.</p>
<p>So if a bond price falls government wont be able to get as much money from selling its bond (for example bond with face value 1000e - i.e. where government promises to pay back 1000 at the end, might only sell for lets say 600e). Alternatively, if government would want to sell its bonds at par it would have to increase the coupon rate which is equivalent of higher interest payment.</p>
<blockquote>
<p>Or is it because it because it becomes more expensive to acquire new loanes from the ECB (with the higher interest rate).</p>
</blockquote>
<p>This is also not completely true.</p>
<p>As explained above, it is because new loans are more expensive. However, governments generally do not borrow from ECB. In fact ECB buying national government debt is still somewhat controversial in EU.</p>
<p>As you can clearly see from the ECB <a href="https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html" rel="nofollow noreferrer">balance sheet</a> the amount of government debt held by  ECB is miniscule. ECB literally has more gold on its balance sheet than national debt of member states.</p>
<p><a href="https://i.sstatic.net/dbXVz.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/dbXVz.jpg" alt="enter image description here" /></a></p>
<p>Although the statistics above is a bit misleading because EU has a lot of institutions such as EU recovery fund that that issues bonds that technically aren't national government bonds but are also bought by ECB. However, ECB does not finance government debt nowhere near to the same tune as Fed in the USA or central banks in many other countries.</p>
<p>The debt of the Eurozone countries is being bought by private banks, retirement funds, other countries (e.g. Greece owns several billions to German government) etc. Not really by ECB.</p>
<p>However, when private banks want to issue more loans they have to borrow money for those loans from ECB (or other banks or depositors). Hence when ECB charges more for money private banks have to charge more for money and vice versa.</p>
<p>So if ECB raises its interest rates all interest rates in the economy will increase, including the implicit interest on government debt.</p>

CC BY-SA 4.0
2022-02-17T15:20:34.853Z
2022-02-17T15:20:34.853Z
1muflon1
<p>In the news you constantly hear that if the ECB raises interest rates the southern European Countries will go in default.</p>
<p>My question:
Is this because the interest rate on old debt will increase?</p>
<p>Or is it because it becomes more expensive to acquire new loanes from the ECB (with the higher interest rate).</p>

<macroeconomics><central-banking>
Does debt issued by the ECB have a floating interest rate?
Keep_On_Cruising
# Does debt issued by the ECB have a floating interest rate?

(Asked by: username_0 on 2022-02-17)

In the news you constantly hear that if the ECB raises interest rates the southern European Countries will go in default.

My question:
Is this because the interest rate on old debt will increase?

Or is it because it becomes more expensive to acquire new loanes from the ECB (with the higher interest rate).

**Tags:** macroeconomics, central-banking

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## 1 answers

### Answer by username_1 on 2022-02-17. Score: 1 | Accepted answer

> My question: Is this because the interest rate on old debt will increase?

Generally, not. Most government bonds have fixed coupon they pay. For example 1000e government bond might pay 10e coupon. The value of coupon is constant it does not change with interest rates.

Interest rates determine how much the bond can be sold for in the market the bond price is given by:

$$P= \frac{C}{i}\left(1-\frac{1}{(1+i)^n} \right) + \frac{FV}{(1+i)^n} $$

where $P$ is the price, $C$ value of fixed coupon bond pays, $i$ interest rate, $n$ number of time periods until debt has to be repaid and $FV$ face value on bond.

Higher interest rate means bond price falls. The fall in price of old bonds does not matter for government, but government must constantly roll over its debt. Ten years ago government might have issued some ten year bonds that now have to be covered by issuing new ten year bonds. Government debts are continuously being rolled over.

So if a bond price falls government wont be able to get as much money from selling its bond (for example bond with face value 1000e - i.e. where government promises to pay back 1000 at the end, might only sell for lets say 600e). Alternatively, if government would want to sell its bonds at par it would have to increase the coupon rate which is equivalent of higher interest payment.

> Or is it because it because it becomes more expensive to acquire new loanes from the ECB (with the higher interest rate).

This is also not completely true.

As explained above, it is because new loans are more expensive. However, governments generally do not borrow from ECB. In fact ECB buying national government debt is still somewhat controversial in EU.

As you can clearly see from the ECB [balance sheet](https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html) the amount of government debt held by ECB is miniscule. ECB literally has more gold on its balance sheet than national debt of member states.

[![enter image description here](https://i.sstatic.net/dbXVz.jpg)](https://i.sstatic.net/dbXVz.jpg)

Although the statistics above is a bit misleading because EU has a lot of institutions such as EU recovery fund that that issues bonds that technically aren't national government bonds but are also bought by ECB. However, ECB does not finance government debt nowhere near to the same tune as Fed in the USA or central banks in many other countries.

The debt of the Eurozone countries is being bought by private banks, retirement funds, other countries (e.g. Greece owns several billions to German government) etc. Not really by ECB.

However, when private banks want to issue more loans they have to borrow money for those loans from ECB (or other banks or depositors). Hence when ECB charges more for money private banks have to charge more for money and vice versa.

So if ECB raises its interest rates all interest rates in the economy will increase, including the implicit interest on government debt.


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