Eurozone: Less debt reductions efforts- BNP

Thibault Mercier from BNP Paribas explains that Eurozone countries can now issue long-term bond at a lower interest rate that nominal growth rates, lowering debt reduction efforts.

Key Quotes:

“When GDP growth is higher than the interest rate on the debt, the public debt ratio can decline even when there is a primary deficit.”

“In 2016, the public debt-to-GDP ratio should decline for the second consecutive year in the eurozone. Even though this figure is an average masking contrasting trends – between one group of countries in which debt is declining, dominated by Germany, the Netherlands, Austria and Portugal, and other countries, like France, Italy and Spain, where debt continues to rise – a general trend is nonetheless taking shape. With the exception of Greece 1 and Portugal, all Eurozone member states can issue long-term bonds at lower interest rates than their nominal trend growth rates.”

“This situation, linked to the ECB loose monetary policy, eases the debt reduction efforts of eurozone member countries.”

“During the crisis, soaring risk premiums and the drop-off in activity triggered a major snowball effect in the peripheral countries. In Spain, for example, it accounted for nearly half of the increase in the public debt-to-GDP ratio between 2011 and 2014. At the time, major primary surpluses (4-4.5% of GDP) were needed to stabilise the debt. Today, thanks to renewed growth and the ECB’s action, Spanish public debt – which has reached 100% of GDP – could level off with a primary deficit of 0.5% of GDP.”