Economic ResearchPublicationsSpecialsECB QE: Quest for Exit

ECB QE: Quest for Exit

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Dr. Lorenz Weimann

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In its latest study, Allianz Research analyzes the impact of monetary normalization on debt service payments of the private sector in the eurozone. The days of extremely low interest rates slowly but surely appear to be numbered. So fears in the market are growing that the withdrawal of cheap money could bring the economy crashing down – because it rests on a foundation of debt and economic players are hooked on the "drug" of cheap money. Are these fears justified? 

Allianz SE
Munich, Apr 26, 2017

Unlike the state, the private sector has taken the last few years as an opportunity to whittle down its debt level. In relation to economic output, private debt in the eurozone has dropped back by no less than 16 percentage points since reaching its peak in 2009. So does this mean that the corporate sector and private households are in a position to stomach a return to higher interest rates? This is the question that this paper seeks to explore by simulating three different scenarios for an interest rate turnaround over the next years leading up to 2022, and analyzing its impact on debt service payments (by use of regression analyses). Let's start with the most important conclusion: even though a return to rising interest rates will pose a challenge to many companies and households - the additional burden remains moderate on the whole. Generally, the expense associated with debt service payments not only remains lower than the values seen when the credit boom was at its peak; it also lags behind the values for the pre-crisis years. The extra burden is certainly not an excuse to continue to print money: from this perspective, there is nothing standing in the way of a return to normal monetary policy.