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ECB projects elevated 2020 public debt as eurozone governments tackle pandemic

The European Central Bank warned that the euro area's public debt could exceed 100% of GDP this year as governments seek funds to mitigate the economic impact of the coronavirus pandemic.

In its biannual financial stability review, the ECB said debt levels across the euro area are forecast to increase 7 to 22 percentage points this year as governments face funding needs for their fiscal stimulus packages.

As a result, the aggregate government debt-to-GDP ratio in the single-currency area could climb to 102.7% in 2020 from 86.0% in 2019.

A longer-than-expected economic contraction, combined with higher funding costs and accumulation of contingent liabilities, would risk putting public debt on an unsustainable path in countries where debt levels are already elevated, the central bank warned.

Government debt is forecast to reach close to 200% of GDP in Greece and around 160% in Italy. Public debt is also expected to be above 100% of GDP in Portugal, France, Cyprus, Spain and Belgium.

"While the large fiscal policy response mitigates the economic cost of the downturn, thereby providing a first line of defense against fiscal debt sustainability concerns, a more severe and protracted economic downturn could give rise to debt sustainability risks in the medium term," the ECB said.

Based on preliminary assessment, eurozone GDP is forecast to shrink 5% to 12% this year amid weak demand and output due to nationwide lockdowns. The economy is projected to a rebound in growth of 4 to 6 percentage points next year, although the ECB warned that the pace of recovery is "very uncertain given the exceptional nature of the shock."