Eu's ageing population will force its member states to reconsider their pension provision
A huge increase in government and corporate debt will be needed if the projected provision for privately funded pensions within the EU is to be met.
That is the view of Graham Bishop, adviser on European financial affairs to SchroderSalomonSmithBarney, who sees the EU's ageing population forcing member governments to reconsider pension provision.
Bishop believes that the increasing demand for private pensions will create a 'bond boom' with higher demand for longer maturity, non-government bonds, but he questions whether the bond market can meet this challenge.
Bishop said eurozone financial assets in pension funds could rise to as much as E10 trillion over the next 10 years and that governments' determination to cut public provision could make this figure even greater. He assesses that at least E4 trillion more of fixed income will need to become available in the eurozone financial markets to match retirement savings that will be held over the next decade.
It is unlikely government debt will make up much of this shortfall, according to Bishop. There was a decline in the pace of issuance over the period when the euro was a virtual currency. He cites figures showing that in 1999, debt issued by central governments was E435bn but came down slightly to E403bn in 2001.
In assessing the necessity of growth in the bond market, Bishop believes government debt is unlikely to grow much in the foreseeable future. He said governments' hands are tied to some degree by the EU Stability Pact, which requires them to have broadly balanced budgets.
However, Bishop stated that by restructuring existing debt, governments could make it accessible to different parts of the market.
He added that debt available to the market only accounts for about half of the E5 trillion of government debt.
Bishop argued that corporate debt is the most effective means of increasing backing for pension funds in the eurozone.
He said: 'The ongoing rationalisation of Europe's corporate structure provides a rich supply of merger and acquisition financing opportunities.'
A forthcoming takeover directive from the European Commission should stimulate bonds when equity markets become more buoyant, according to Bishop.
Another means of making more fixed interest investment open to investors is non-EU sovereign debt, Bishop said.
Countries that are applicants for entry into the eurozone could be a particularly useful source of finance. Their debt could be used as backing for pension funds as they prepare for entry.
Bishop added that although current applicant's GDP is only about 5% of EU GDP, other states on the union's periphery
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