Government debt maturity and debt dynamics in euro area countries

This paper studies the impact of debt maturity on the dynamics of sovereign debt of Euro Area (EA) countries. Due to lack of data, this key issue had not been studied before. Thus, my first contribution is to build a new comprehensive database of sovereign debt stocks and yields, at all different maturities, for six EA countries in 1991–2013: Belgium, Finland, France, Germany, Italy and Spain. In general, since 1991, interests rates in the EA have fallen while Treasuries in the region extended debt maturity; thus, an increasing number of long-term bondholders experienced large capital gains. I show with counterfactual simulations the effect of a different maturity structure on the evolution of debt. My analysis suggests that extending debt maturity in 2013–2015 would result in lower debt ratios by 2022. I also estimate the impact on EA debt-to-GDP ratios induced by changes in current and future inflation. My estimates indicate that higher (lower) inflation in EA countries would lower (raise) their fiscal burden much more than in the US.