Bad debts hampering European economic growth

Bad debts hampering European economic growth

Bad debts hampering European economic growth With uncertainty continuing to plague markets weeks after the Brexit referendum, Europe must be getting used to being covered in the financial press. But while most stories relate to fallout from the UK’s decision to leave, there may be another systemic problem brewing for the European Union.

An economic commentary on the Stone Investment Group website states that “a tangled web of liabilities spilling over national borders – both on the Continent and abroad” has become a considerable burden to the European economy. As European banks are saddled with bad debts, they are prevented from extending credit to the real economy, a function necessary to drive GDP growth. This has led to slowed growth and the possibility of deflation.

The problem is especially pronounced in Italy, where banks generally have more debt than equity holdings. Retail investors in the country hold a considerable proportion of lenders’ bonds, the commentary reports, adding that  “a bail-in of creditors would disproportionately hurt the man on the street, but new EU state aid rules, implemented this year, call for only this course of action.”

Citing the growing price of inaction, the commentary calls for decisive measures to stem the problem. A parallel was drawn between the European banking system’s current situation and that in the US back in the 2008/09 financial crisis, when widespread bailouts and write-downs of bad loans were enacted. “At the time, this caused controversy and consternation. But it has allowed its market to rebuild on solid foundations.”

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