Euro-zone debts are looking increasingly unsustainable

LAST week there was turmoil in financial markets. Investors started to worry about whether struggling euro-zone economies would be able to pay back their debt. Yields on Greece’s sovereign bonds (loans made to the Greek government) briefly exceeded 9%, a big jump. So how bad is euro-zone debt?

Private-sector debt is not too concerning, with the exception of Ireland. Italy’s households owe less than Germany’s and its non-financial companies not much more. On October 26th the results of the European Central Bank’s asset-quality review of big euro-zone banks will be released. It is expected to show few serious problems. But government debt looks more intractable. Between 2007 and 2013 government-debt-to-GDP in the euro area rose from 66% to 93%. The spike was more dramatic in the four troubled economies along Europe’s southern border: in Greece the ratio increased to 175% and in Portugal it virtually doubled, to 129%. There is little evidence that government debt itself crimps economic growth. But as bond yields rise, servicing that debt becomes difficult, especially for countries like Italy, which has to refinance about one-fifth of its government debt each year.

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