Europe's Debt Recovery: A Best-Case Scenario

Societe Generale's Co-Chief European Economist James Nixon believes that the European debt crisis will take at least three years to resolve, citing the need for fiscal reforms and debt reduction in southern European countries. While Ireland has been commended for its efforts to tackle public sector debt, Nixon warns that further austerity measures may lead to civil unrest. He also predicts that the European Central Bank (ECB) will struggle to exit the debt-buying business, as it becomes increasingly difficult for peripheral countries to issue new debt in the market.

Key Takeaways:

• The European debt crisis will take at least three years to resolve, with southern European countries needing to implement meaningful fiscal reforms and debt reduction to demonstrate a sustainable debt trajectory.
• While Ireland has made progress in reducing public sector debt, further austerity measures may lead to civil unrest, making it unlikely to achieve a sustainable debt trajectory in the near future.
• France is unlikely to be downgraded, with its diversified tax base and lower debt levels compared to smaller peripheral economies.
• The ECB faces significant challenges in exiting the debt-buying business, as peripheral countries struggle to issue new debt in the market, putting a burden on the ECB to continue supporting the market.
• The ecological value-added tax (EVT) mechanism, introduced to address liquidity problems in the Euro area, has been successful but has not addressed the longer-term solvency issues that may weigh on the Euro for years to come.
• Societe Generale's Co-Chief European Economist James Nixon believes that the markets are imposing a de facto rule on countries with debt levels above 5%, making it difficult for them to issue new debt and fund themselves in the market.

Statistics:

• The stabilization fund put in place to address the Euro area's liquidity problems has been successful but has not tackled the longer-term solvency issues. (Source: Bloomberg)
• The ECB faces a situation where realistically it's hard for any of the countries to issue new debt and fund themselves in the market. (Source: Bloomberg)
• Southern European countries will take at least three years to make meaningful inroads into their fiscal positions. (Source: Societe Generale)
• Ireland has made an attempt to demonstrate to the markets that it has taken the bulk of the pain up front. However, it still needs to cut spending in the future to achieve a sustainable debt trajectory. (Source: Bloomberg)
• France has a diversified tax space and lower debt levels compared to smaller peripheral economies, making it less likely to be downgraded. (Source: Societe Generale)

Sources:

• James Nixon, Co-Chief European Economist, Societe Generale
• Deirdre Bolton, Reporter, Bloomberg News