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The massive debts taken on by Europe’s businesses and governments to survive the economic shutdown raise risks of financial turmoil if the economic recovery does not go smoothly, the European Central Bank (ECB) warned on 19 May in its latest review of the continent’s financial stability.
“There is a reality that [2020’s crisis] will leave a legacy of higher debt and weaker balance sheets, which – if unaddressed – could prompt sharp market corrections and financial stress or lead to a prolonged period of weak economic recovery,” ECB vice-president Luis de Guindos said in a statement quoted by the Financial Times.
The total debt of Eurozone governments and corporations has risen from 86 percent of GDP in 2019 to 100 percent in 2020, the ECB noted. The debt burden is larger than the one accumulated during the Great Recession and the subsequent European debt crisis that peaked in 2012, the bank noted.
Governments have offered corporate loan guarantees totaling 14 percent of GDP, the bank said; however, businesses have accepted loans equivalent to only 4 percent.
The companies most heavily in debt grew their debt load the most, the bank reported, with corporations at the 90th percentile of indebtedness, swelling their debt burden from 220 percent of equity to 270 percent.
However, the impact of the sharp rise in debt has been softened by the ECB’s negative interest rates and €20-billion monthly bond-buying program, the ECB pointed out.
Next year, more than half of the EU’s 19 member countries will carry debt loads exceeding 60 percent of GDP, the limit on a country’s sovereign debt that the union has imposed on member countries.
The union suspended the limit during the economic crisis.
The bank will leave its soft-money policies in place, de Guindos said, and that any change would be “gradual” and “prudent.”
TREND FORECAST: As inflation continues to rise, so, too, will interest rates. As interest rates rise, debt bombs in both the public and private sectors will explode. In addition, we forecast when interest rates in the Eurozone, which are now in negative territory at -0.5 percent, rise to 1.25 percent, equity markets will dive and economies will plunge into the “Greatest Depression.”