Spain debt

The ECB and growing eurozone debt

IN ONE LOOK

  • Between 2009 and 2012, the euro area experienced a sovereign debt crisis
  • European Central Bank ends its bond-buying program and prepares to hike rates

Is the euro zone headed for a new debt crisis?

Judging by the overall level of debt in Europe, the answer seems to be “no”. European debt ratios have barely budged since 2012.

Bubbling beneath the seemingly calm surface, there is a more complex reality.

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Keep score

Some eurozone countries, including Ireland, the Netherlands, Portugal and Spain, have spent the last decade deleveraging and their debt ratios have plunged. While countries like Germany and Austria still have much lower than average debt ratios compared to Greece and Italy which have average or above average debt ratios but do not have not worsened. However, there is a group of countries that is more worrying. Belgium, Finland and especially France have seen their level of indebtedness grow much faster than economic activity. This left France as the most indebted nation in Europe.

A precarious situation

Part of the reason there hasn’t been a debt crisis in Europe for the past decade is that the European Central Bank (ECB) had interest rates near or even below zero. ECB President Christine Lagarde has announced a 25 basis point rate hike for July and possibly a 50 basis point rate hike for September. In a rising rate environment, the potential for a debt crisis is increasing, particularly among Europe’s most indebted countries, and European bond yields are beginning to reflect this risk.