Huge private debts spell trouble in Europe
Bad loans threaten to cripple economies
Awayfromthemarkets’fixation with the debts of Greece and other governments, concern is growing at the painfully slow progress Europe is making in tackling a much bigger mountain of corporate and household debt.
With austerity pointing to weak growth if not outright recession, the risk is that the burden of servicing the debt can only increase, causing a rise in bad loans. The spotlight then would fall on the capacity of banks to take losses and whether they might have to turn to their governments for help.
And overindebtedness is not confined to the periphery of the bloc.
Denmark, Sweden and the Netherlands all have private-sector debt that far exceeds the safety threshold of 160 per cent of GDP set by the European Commission as part of a new exercise to detect and correct risky macroeconomic imbalances.
In the case of the Netherlands, the main culprit is home loans, which have risen more than seven per cent a year since 2000, as borrowers have taken advantage of the tax deductibility of mortgage interest, according to Dutch central bank governor Klaas Knot.
“In my view the high stock of mortgage debt is among today’s biggest vulnerabilities of the Dutch economy,” Knot, a member of the European Central Bank’s Governing Council, said in a recent speech.
Up to a point, debt is not only good for growth, it is vital. But it’s possible to have too much of a good thing.
The commission, the EU’S executive body, said no fewer than 15 of the EU’S 27 members exceeded its 160 per cent safety cut-off, led by Ireland on 341 per cent.
A recent working paper by the Bank for International Settlements concluded that when public debt rises to 95 per cent of GDP from 85 per cent, trend economic growth can be reduced by more than one-tenth of a percentage point.
For corporate debt the pain threshold is closer to 90 per cent and the economic hit is slighter, while for household debt the BIS’S best guess is that the inflection point is around 85 per cent of GDP.
“A clear implication of these results is that the debt problems facing advanced economies are even worse than we thought,” said the BIS authors, led by chief economist Stephen Cecchetti.
Although private sector debt burdens are worryingly high in a host of European countries, the markets’ focus is understandably on those countries that have either been bailed out by the EU and the International Monetary Fund or are struggling to sell their bonds at nonpunitive rates.
Take Spain. Its public deficit in 2011 was equivalent to 8.51 per cent of gross domestic product, Finance Minister Cristobal Montoro said Monday, up from a preliminary estimate of 8.2 per cent, mainly because of overspending by regional governments. Meanwhile, the country is drowning in private-sector debt equivalent to 227 per cent of GDP.