Scenarios for government debt in Europe

The risk premiums that have to be paid by a number of EMU countries on the capital market remain stubbornly high. This is testimony to the market’s lack of confidence in these countries' ability to get to grips with their debt problems without the need for debt restructuring. It is not, however, just the financial markets, but also policymakers that seem increasingly convinced that Greece, at least, will have to restructure its debt.

Is there a tipping point which can be used to determine when sovereign debt restructuring is advisable or even imperative? “Greece's government debt ratio came in at 140 percent of GDP last year – but Japan's was almost 200 percent. As the Japanese example shows, high debt levels do not necessarily translate into a considerable interest burden,” said Michael Heise, chief economist at Allianz SE. “Greek interest payments in 2010 totaled around 6 percent of GDP – back in 1995, they were still hovering at around 11 percent of GDP. These examples show that pinpointing generally valid criteria for debt restructuring is far from straightforward.”

The economists at Allianz have put the spotlight on the debt and interest burdens of Greece, Ireland, Portugal and Spain, using various scenarios. The development of both these parameters hinges crucially on fiscal policy discipline, future economic growth and the financing conditions prevailing on the financial markets.

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