French political instability poses risks to eurozone financial stability given its high levels of debt, while casting fresh doubts on the EU's ability to respond to existential challenges
An excellent piece Simon. Thank you. The only observation I would make is that when it came to the euro area crisis of a few years ago, Greece was clearly fundamentally an issue surrounding government debt sustainability, made worse by money leaving the country (this could be tracked in almost real time, as the Central Bank published its balance sheet on a monthly basis); Spain more an issue of the substantial imbalances that were allowed to build up prior to the GFC (with the corporate sector running at the peak, a deficit of over 15% of GDP).
With Spain, the level of debt, private, or public, was less of the problem. With the GFC, inflows required to finance this deficit ceased, pushing the Spanish economy into a deep recession - just before Mario Draghi stepped with his promise to do whatever it takes, Spanish government bond yields seemed to danger of going through 7%, the trigger for Greece, Ireland and Portugal to all be pushed into the "bailout." What was also surprising at the time was that so many commentators expected Spain to bounce back relatively quickly.
As my colleague Marchel has also highlighted, recent months have also seen French banks significantly increase their exposure to non-domestic debt, a potential issue if interest rates stay high, for longer.
I will do more work on this in the next few days. Italy for sure has always had different economic fundamentals to France! Kind regards, David
Thanks David. I agree the total/private debt point does not map onto all episodes of financial stress and there were different dynamics playing out across the periphery during the eurozone crisis. I should have pointed out that Ian Harnett in making the point about total debt was in turn citing Richard Vague's book "A brief history of Doom" which looks at the history of financial crises over 200 years. To the extent that the eurozone debt crisis was a product of the GFC, it certainly had its roots in the build up of private debt in America!
An excellent piece Simon. Thank you. The only observation I would make is that when it came to the euro area crisis of a few years ago, Greece was clearly fundamentally an issue surrounding government debt sustainability, made worse by money leaving the country (this could be tracked in almost real time, as the Central Bank published its balance sheet on a monthly basis); Spain more an issue of the substantial imbalances that were allowed to build up prior to the GFC (with the corporate sector running at the peak, a deficit of over 15% of GDP).
With Spain, the level of debt, private, or public, was less of the problem. With the GFC, inflows required to finance this deficit ceased, pushing the Spanish economy into a deep recession - just before Mario Draghi stepped with his promise to do whatever it takes, Spanish government bond yields seemed to danger of going through 7%, the trigger for Greece, Ireland and Portugal to all be pushed into the "bailout." What was also surprising at the time was that so many commentators expected Spain to bounce back relatively quickly.
As my colleague Marchel has also highlighted, recent months have also seen French banks significantly increase their exposure to non-domestic debt, a potential issue if interest rates stay high, for longer.
I will do more work on this in the next few days. Italy for sure has always had different economic fundamentals to France! Kind regards, David
Thanks David. I agree the total/private debt point does not map onto all episodes of financial stress and there were different dynamics playing out across the periphery during the eurozone crisis. I should have pointed out that Ian Harnett in making the point about total debt was in turn citing Richard Vague's book "A brief history of Doom" which looks at the history of financial crises over 200 years. To the extent that the eurozone debt crisis was a product of the GFC, it certainly had its roots in the build up of private debt in America!