Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Sunday, 4 August 2013

Saving Europe's Bacon - Still running in cinemas



Peripheral yields are down, the Euro is up and once again the worst seems to be over. Since it is a debt-crisis, maybe looking at the burden of debt on peripheral economies is likely to be more instructive than extrapolating a trend change from one datapoint (be it PMI or unemployment).

On this score, the graph below shows the great strides made in reducing indebtedness amongst peripheral European countries.

Graph 1: This is the debt-GDP trajectory under austerity
Source: Eurostat

Perhaps it is time to redefine the “sustainable” debt/GDP ratio of 120% upwards? After all it was a number pulled out of an economist's hat. Moreover some genius economists argue that with yields at the lows, the total debt which an economy can shoulder is much higher. Further, all the peripheral economies have achieved such success in broadening their revenue base (and not to forget privatising) that they can easily cope with this “temporary” debt burden.

As the graphs show, both interest expense and debt as a proportion of government revenue have never been higher for the peripherals. The only exception is Greece where PSI helped kick the can further down the road.

Graph 2: Thankfully broadened revenue bases can shoulder the increased debt
Source: Eurostat

Graph 3: Maybe the official sector will make loans at 0% interest
Source: Eurostat

Well at least, those deficits are under contol…

Graph 4: Fiscal compacts are more honoured in the breach than the observance
Source: Eurostat

This whole crisis is like a bad horror movie franchise built upon an initial blockbuster. The plot lines are tired and it’s fairly obvious what’s coming next. The only surprising thing is the audience’s credulity at every clich├ęd twist. Making matters even worse is the fact that the colourful cast from the initial instalments has been replaced. Who is going to provide memorable moments such as these?

"I would like to say how happy I am that a solution to the Greek crisis, which has weighed on the economic and financial situation in Europe and the world for months, has been found." – M. Sarkozy, March-2012 (http://www.bbc.co.uk/news/business-17308804

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