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BANKING

Sovereign debt: Debt levels are unsustainable, and nothing, as yet, has been done to improve them

It is now more than four years since the financial market crisis broke out with the wholesale collapse of the US mortgage-backed securities market in the summer of 2007. It is 16 months since the European sovereign debt crisis erupted, when, with Greek bonds trading at 80% of face value, primary and secondary government bond markets seized up across the eurozone in the first week of May 2010.

 

The worry today remains what it was back then: that western economies still have not made the wrenching adjustment from a long period when they required excessive leverage just to deliver even moderate growth into a new period when the markets will no longer tolerate such levels of debt. Much of the periodic panic that afflicts markets comes from the worry that the western world still has far too much debt in what is a deleveraging cycle. Analysts such as Jim Reid at Deutsche Bank reckon that markets might be slowly starting to share the view that the western financial system built over the past two to three decades might be totally unsustainable. He adds that such a realization might be cataclysmic for markets and would challenge everything the vast majority of financial market participants have come to take for granted over the course of their careers.

Reid and his colleagues chart this over-leverage not with sovereign or public debt ratios in isolation but with combined government and private-sector debt-to-GDP ratios. By this measure, France’s combined public-sector and private-sector debt is 165% of GDP, compared with 58% before the birth of the euro in 1998.

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