Well, today I want to stress something about debts in the eurozone. You probably heard a huge amount of fuss regarding public debts, especially in Greece, Spain, Italy, Ireland… but is it the real issue? It may not be.
In fact, private debt, either from companies or private corporations, either by households through mortgages, credit card debt, student debt or car debt, is a big issue. The real thing that matters about the banking union in the EU is that from 2014 and 2015, there will be a systemic investigation from the ECB into the balance sheets of all european banks. Balance sheet is composed of liabilities (what the bank borrowed), assets (what the bank owns) and equity. I don’t remember well about all these category but I strongly recommend you to watch this tutorial in the khan academy website. This is the major step towards a better regulation. I can’t help quoting Dominique Strauss Khan (former managing director of the IMF) when he was interviewed for the first time in a english-speaking channel, CNN, a few months ago : “the European banking system is ill”. We need to add implicitly : more ill than in the US. ECB officials will then start peering into the banks’ balance sheets and impose common standards for loan quality.
Watching a documentary such as Noire Finance from Arte will help you to understand that EU banks are vastly more important than in the US. A big bank can represent half of the GDP of its member state whereas in the US, it’s not possible. So a rescue from governments is possible in the US but very costly in the EU. This process is supposed to find out which banks are viable now, which will need more capital and which should just be closed down quickly.
Europe is always thought of as having a sovereign-debt crisis, and it has. But the origins of the problem lay less with government spending than with excessive private borrowing. Corporate debt in Spain, Ireland and Portugal represent no less than 200% of GDP before the crisis. Thanks to mortgage write-downs and faster growth, America’s households have unwound about two thirds of the excess debt built up during the boom years. Most Euro-zone countries have achieved far less private sector “deleveraging”, for three reasons. First the fiscal austerity imposed on Europe’s peripheral economies deepened their recessions. Second, weak banks have been reluctant to recognize, and then make provisions for, non performing loans. And third, European bankruptcy law is less debtor-friendly than America’s. Europeans typically remain liable for unpaid mortgage debt.
The household debt burden is especially extremely important in Ireland and the Netherlands (around 100% of GDP). Paying the mortgage strains household finances and crimps consumer spending.
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