The ECB and Mounting Eurozone Debt

In an effort to tame soaring prices across the eurozone, the ECB is prepping to raise interest rates. What impact will a rising rate environment have on Europe’s debt situation?

Is the eurozone headed for another debt crisis?

Judging from the overall level of debt in Europe, the answer seems to be “no.” European debt ratios have barely budged since 2012.

Graphic: Eurozone Debt

Bubbling beneath the apparently calm surface there is a more complex reality.

Keeping Score

Some eurozone countries, including Ireland, the Netherlands, Portugal, and Spain have spent the past decade deleveraging and their debt ratios have plunged. While countries like Germany and Austria still have far below-average debt ratios compared to Greece and Italy which have average or above-average debt ratios but ones that haven’t gotten worse. However, there is one group of countries that are more worrisome. Belgium, Finland, and especially France have seen their debt levels grow much faster than economic activity. This has left France as Europe’s most indebted nation.

A Precarious Situation

Part of the reason there has been no debt crisis in Europe over the past decade is that the European Central Bank (ECB) had interest rates near or even below zero. ECB president Christine Lagarde has signaled a 25 basis point rate hike for July and perhaps a 50 basis point rate hike for September. In a rising rate environment, the potential for debt crises grows, especially among Europe’s most indebted nations, and European bond yields are beginning to reflect that risk.

Graphic: U.S. and European 10Y Bond Yields

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