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By Alan Wheatley, Global Economics Correspo
February 22, 2012 3:35 PM EST
Away from the markets' fixation with the debts of Greece and other governments, concern is growing at the painfully slow progress Europe is making in tackling a much bigger mountain of corporate and household debt.
With austerity pointing to weak growth if not outright recession, the risk is that the burden of servicing the debt can only increase, causing a rise in bad loans. The spotlight then would fall on the capacity of banks to take losses and whether they might have to turn to their governments for help.
And overindebtedness is not confined to the periphery of the bloc.
Denmark, Sweden and the Netherlands all have private-sector debt that far exceeds the safety threshold of 160 percent of GDP set by the European Commission as part of a new exercise to detect and correct risky macroeconomic imbalances.
In the case of the Netherlands, the main culprit is home loans, which have risen more than 7 percent a year since 2000 as borrowers have taken advantage of the tax deductibility of mortgage interest, according to Dutch central bank governor Klaas Knot.
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"In my view the high stock of mortgage debt is among today's biggest vulnerabilities of the Dutch economy," Knot, a member of the European Central Bank's Governing Council, said in a recent speech in London.
Up to a point, debt is not only good for growth, it is vital. But it's possible to have too much of a good thing.
The Commission, the EU's executive body, said no fewer than 15 of the EU's 27 members exceeded its 160 percent safety cutoff, led by Ireland on 341 percent.
A recent Bank for International Settlements working paper concluded that when public debt rises to 95 percent of GDP from 85 percent, trend economic growth can be reduced by more than one-tenth of a percentage point.
For corporate debt the pain threshold is closer to 90 percent and the economic hit is slighter, while for household debt the BIS's best guess is that the inflection point is around 85 percent of GDP.
"A clear implication of these results is that the debt problems facing advanced economies are even worse than we thought," said the BIS authors, led by chief economist Stephen Cecchetti.
PAIN IN SPAIN
What should be done?
"Current efforts focus on raising the cost of credit and making funding less readily available to would-be borrowers. Maybe we should go further, reducing both direct government subsidies and the preferential treatment debt receives. In the end, the only way out is to increase saving," the BIS paper said.
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