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The issue of reducing the total debt ratio (public + private) in Europe

- "The analysis of excess indebtedness in Europe has recently focused on public debts, given the risk of sovereign defaults. However, we should not forget the risks linked to private debts - household and corporate - which, if they are excessive, may lead to a serious banking crisis. We therefore believe it is necessary to look at the risk linked to the total debt, public and private, something that changes the appreciation of the relative risk of different countries."
- "The outlook is worrying:
• the low nominal potential growth in many countries makes a reduction in debt ratios difficult;
• inflation cannot return soon, and real interest rates are relatively high, especially in countries attacked by the financial markets. There is therefore a very significant need to generate additional savings (primary surpluses in the case of public debts) to reduce debt ratios, leading to a pronounced slump in demand;
• defaults can in reality be ruled out, for countries as well as for banks, even though they are sometimes mentioned as a possibility."
- "So it is likely that the only solution will be a huge monetisation of both public and private debts, i.e. a transfer of risky debts to the balance sheets of the ECB and the Bank of England. We still have to analyse the effects of the considerable increase in liquidity (in the size of the balance sheet of the ECB and the Bank of England) which this massive monetisation would lead to; as well as the effects of the deterioration in the quality of these balance sheets."
Natixis Flash Economics 328 20100628

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