Pictet: Eurozone auch ohne Griechenland in Gefahr

Greece is not the only weak link in the euro zone. There are some other countries in the region’s periphery that could be hamstrung by their high public debts in the event of recession. The European Central Bank’s quantitative easing programme may have given these economies some breathing space but the euro zone’s future can only be secured by deepening ties among its member states.

Imagine waking up tomorrow to discover that Greece’s precipitous slide into a debt vortex had been nothing but a bad dream. Its shattered economy, the month-long shuttering of its banks, its possible exit from the euro zone – all part of the same disturbing nightmare. 

How would the euro zone look on such a morning?

In reasonable condition, perhaps. But hardly a picture of perfect health.

True, the region’s households and businesses are shedding debt. Household debt as a proportion of GDP has shrunk by more than 3 percentage points since 2009 to about 60 per cent, considerably below that of the US, which is running at 76 per cent. Corporate balance sheets are healthier too. Excluding the financial sector, euro zone company borrowing amounts to 100 per cent of GDP, a 7.5 percentage point decline from a peak hit six years ago. 

Yet, as any student of credit crises knows, cutting private debt is just the first step countries must take to place their finances on a more stable footing. And judging from the progress made so far, there are a fair number of euro zone nations besides Greece that remain stuck in the danger zone. 

That’s because debt reduction – or deleveraging – is a complex and drawn-out process, part of a long credit cycle whose phases overlap and unfold over many years. The cycle typically begins with the build-up of private debt which, left unchecked, morphs into a credit bubble. When this bursts and recession ensues, private debts fall and public debts rise, either because governments assume private liabilities or because slower economic growth reduces tax revenue. Then begins the most difficult task of all: bringing down public borrowing.

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