We have been drawing comfort from a delusion, or two to be exact. One is that time is slowly healing the dramatic plunge into emergency debt in 2008-9. The subsequent rhetoric of western governments and central banks has been of “austerity”, deleveraging and earnest promises on debt and deficit reduction. We are making steady if slow progress towards debt reduction.
The second is that the Eurozone crisis has now largely passed, its troubled economies are on the mend and the problems of debt-laden Greece, while acute, are containable by compromise, given enough time.
Two developments compel a rethink of these cosy assumptions.
One is a survey from the respected McKinsey Global Institute. Its study of 47 major economies finds that global debt, far from having shrunk since 2007, has grown ferociously. It has risen by $57 trillion (£37.4 trillion) to stand at $199 trillion, equivalent to 286 per cent of global GDP.
The single biggest contributor to this is government debt, up by $25 trillion over these seven years.
Of those 47 major economies, only five – Israel, Egypt, Romania, Saudi Arabia and Argentina – have cut their debts. A further five have seen massive rises in indebtedness. The debts of China have risen by 83 percentage points, Portugal’s by 100 percentage points, Greece’s by 103 percentage points, Singapore’s by 129 percentage points and Ireland’s by 172 percentage points.
On the UK, McKinsey finds that debt has increased by 30 percentage points, to 252 per cent of GDP (this figure excluding financial sector or City debts). Government debt has jumped by 50 percentage points of GDP. This is why further spending constraint and the likelihood of tax rises lie ahead, whatever is promised in the approach to the general election in May.
Debt is the four-letter word that could not just destroy the nervous recoveries since 2012 but also plunge the Eurozone into economic paralysis and ruin. As the debt piles grow and “emergency” low levels of interest rates persist into their fifth year and beyond, comfortable assumptions about rational market-friendly outcomes need to be revisited. Debt could yet ruin us all.
Lest we think the events in Greece have little relevance to our own condition, consider this. The stand-off between the new Greek government and Germany captures a profound problem facing most of the advanced western economies: how can debt-laden countries pull themselves back from the brink and deleverage without damaging their fragile economic recoveries?
Indeed, Greece is an example in extremis of the Catch-22 trap facing many countries: the harder the pursuit of “austerity” measures, debt reduction and deleveraging, the harsher the impact on their domestic economies.
Greece has now ushered in a new anti-austerity government and given it a mandate to negotiate a new debt deal with its creditors. But Germany and the European Central Bank are standing fast against demands to rewrite a ¤240 billion bailout agreement. Meetings between the Greek and German finance ministers ended last week in deadlock.
Germany is opposed to proposals by the Greek finance minister Yanis Varoufakis to swap existing government debt into growth-linked bonds where the interest rate is kept low until economic growth revives.
It sounds sensible. But who would determine the level of growth that would trigger a rise in bond interest payments? How would that growth be measured? And by whom? As Germany sees it, such a proposal would not address the need for Greece to undertake structural reforms, tackle corruption and push ahead with state asset sell-offs. Indeed, the new government has already halted privatisation deals. Such debt moderation would let the country off the hook of reform – and Germany is opposed to anything that smacks of central bank financing of imprudent governments.
But failure to reach agreement here pushes not just Greece but the whole of the Eurozone to a defining moment. Contagion is the primary concern here.
Greece may account for less than 3 per cent of Eurozone GDP. But if it succeeds in wrestling new bailout terms, not only will there almost certainly be “backlash” gains for populist parties within Germany but also immediate calls from other highly indebted Eurozone members such as Italy, Portugal and Spain to abandon austerity and seek relief from the debt burden too. Spain faces a general election in the autumn which the anti-austerity Podemos party would be the favourite to win.
Nor can France be considered immune when both the left-of-centre president François Hollande and right-winger Marine Le Pen have both welcomed the new Greek government: Hollande is calling for an end to “destructive austerity” while for Le Pen and her National Front, it’s about the end of the euro currency itself. This is what makes this crisis so complex and why it directly threatens the “one-size-fits-all” drive towards monetary and political union.
Debt has brought not only Greece but the Eurozone once more to the precipice. What seemed a containable problem amenable to market-friendly solutions becomes an altogether wider and more serious matter. With the euro-denominated debt of these countries held within the banking industry it would be impossible to throw a firewall around Greece when flames are bursting through elsewhere.
Slowly, invisibly, two profound changes have stolen across our economic and political landscape. “Big debt” is going to be with us for far longer than was ever envisaged back in 2010. And ultra-low interest rates, far from being a short-term emergency reaction to the prospect of deep recession, now appear to be a continuing requirement for economic growth to be sustained at all. Low interest rates are no longer a product of financial crisis but of a step-change in economic history.
Nothing has changed – and everything. Prevailing assumptions that the outcome of all this will be rational and market-friendly may be comforting. But they make light of the stark and pressing realities we really face today. «