Eurozone’s sovereign debt not a problem anymore?

José Manuel Barroso, President of the EC, participated in the European Parliament plenary session. He said that an essential element of a larger package of action to respond to the sovereign debt crisis includes a strengthening of the European Stability Mechanism. (EC Audiovisual Services).

José Manuel Barroso, President of the EC, participated in the European Parliament plenary session. He said that an essential element of a larger package of action to respond to the sovereign debt crisis includes a strengthening of the European Stability Mechanism. (EC Audiovisual Services).

Understandably sovereign debt statistics for Eurozone and the EU have become most crucial over the past five years, not only for the implicated countries but also for the global financial community. Until recently a bad spell over Greece’s prospects concerning its government debt could send all and every world market to a downwards spiral. And this despite the fact that the country’s tiny economy represents only around 2% of Eurozone’s Gross Domestic Product (GDP).

Eurozone debt stable

As a result it was not without good reason that the financial community of the planet learned with relieve that Eurozone’s overall government debt as a percentage of GDP appeared stable during the third quarter of 2012. This aggregate measurement of government obligations for the entire Eurozone compared with relevant statistics in other economies of similar structure, like the United States and Japan are not at all alarming.

On the contrary Eurozone’s government debt is well below the 100% of the GDP benchmark at around 90%, while Japan’s similar statistic is at least the double. In the US this crucial percentage has recently climbed above the benchmark and continues in an upwards course, given that the Obama administration is constantly asking the Congress for higher debt ceilings.

Why then Eurozone’s debt was so crucial? The reason is that for one thing the Greek debt as an absolute number was well above €300 billion. When in December of 2009 the country said it couldn’t honour its obligations without help, it set the alarms all over the world. Almost all major banks were exposed to Greece directly or indirectly. If the other Eurozone governments and the European Central bank had not undertaken the largest part of it, the world could have fell into a new abyss, worse than the grate credit meltdown which followed Lehman Brother’s collapse. Incidentally Lehman’s bankruptcy left a gap of “only” $120bn.

Why EU debt differs?

On top of that there more elements which make the European debt more risky. In Japan the country’s government debt is financed mainly by the huge internal savings. So at the end of the day those trillions yen of sovereign obligation is an internal affair of Japan. The Tokyo government and the Bank of Japan can take measures to contain any problem to fix any problems with it. As for the US, the six American war fleets on the oceans of the world and the economic supremacy of the country have in a way imposed a global acceptance of the US debt paper and all dollar values. As a result there are many willing investors to lend money to America.

Turning to the recent Eurostat announcement about Eurozone’s debt, markets considered it as reassuring. In detail, according to the European statistical service “at the end of the third quarter of 2012, the government debt to GDP ratio in the euro area (EA17) stood at 90%, compared with 89.9% at the end of the second quarter of 2012”.

Eurostat announcement continues as follows, “Due to the involvement of EU governments in financial assistance to certain Member States, and in order to obtain a more complete picture of the evolution of government debt, quarterly data on intergovernmental lending (IGL) are also published. The share of IGL in GDP at the end of the third quarter of 2012 amounted to 1.7% for the euro area.

The highest ratios of government debt to GDP at the end of the third quarter of 2012 were recorded in Greece (152.6%), Italy (127.3%), Portugal (120.3%) and Ireland (117.0%), and the lowest in Estonia (9.6%), Bulgaria (18.7%) and Luxembourg (20.9%)”.

 

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