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3 May 2013
Forex Flash: Indebtedness of Eurozone economy is key driver in crisis – Goldman Sachs
FXstreet.com (Barcelona) - The net indebtedness of the whole Eurozone economy, rather than just the public sector, was a key driver of sovereign spreads during the Euro area debt crisis between 2010 and mid-2012: the rise in sovereign bond spreads in this period is better correlated with a country’s initial net international investment position than with public-sector indebtedness.
According to the Economics Research Team at Goldman Sachs, “As became evident during the financial crisis, private-sector indebtedness can quickly migrate onto the public sector’s balance sheet during times of stress. Conversely, private-sector assets reflect a contingent public asset (via taxation) and tend to work towards a more stable public-sector funding environment.”
“In our view, a relatively low stock of net debt for the total economy is required to stabilize the economies of the Euro area periphery. Simply attaining, say, a balanced current account (such as Greece and Spain have done recently) is insufficient.” the team adds.