Although concerns regarding European sovereign debt sustainability have quieted, they could resurface if economic growth in some countries stalls or governments become more profligate, or both, according to a recently released special commentary from Wells Fargo, How Sustainable is European Sovereign Debt.
Of the six economies analyzed, Germany stood out “in terms of debt sustainability under most ‘realistic’ scenarios,” the report notes. “The AAA credit rating of Germany is well deserved.” Greece took similar honors “in terms of debit (un)sustainability," and France, Italy, Portugal and Spain "could stabilize government debt-to-GDP ratios, if nominal GDP growth rates remain solid, borrowing costs remain low and governments stay committed to fiscal discipline," it adds.
To achieve and sustain stronger economic growth rates, countries would likely need politically challenging structural economic reforms. “There is not much room for error,” the commentary states. “Most combinations of fiscal slippage, rising borrowing costs and economic deceleration would cause debt ratios to rise further.”
Wells Fargo identified four factors that debt sustainability, or stability in a country’s debt-to-GDP ratio, requires: debt-to-GDP ratio at present, the government’s primary fiscal surplus or deficit (i.e., the fiscal position net of interest payments), the nominal GDP growth rate and the rate of interest the government needs to pay on its debt.
- Diana Mota, NACM associate editor