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Sunday, July 26, 2015 6:55 PM

Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy

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The eurozone is supposedly in a state of recovery. However, in spite of that recovery, public debt and debt-to-GDP levels are still rising. Austerity is difficult to find in any realistic sense.

Please consider Eurozone Borrowing Rises to Record as Recovery Remains Weak.

The European Central Bank’s programme of quantitative easing has pushed down interest rates to ultra low levels, encouraging governments to borrow more in the early part of this year, despite turmoil in Greece.

Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU’s statistical agency.

Greece remains the EU’s most indebted nation, with debt equal to 169 per cent of annual GDP, but Italy, Belgium, Cyprus and Portugal also carry government debt that exceeds 100 per cent of economic output.

The rise in debt comes despite a pickup in the pace of recovery in the eurozone, with the region’s economy expanding 0.4 per cent in the first quarter of this year — while the US saw a contraction.
Targets vs. Reality

The "Growth and Stability" pact on which the Eurozone was founded limits debt to 60% of GDP and deficits at no more than 3%.

Average Debt-to-GDP is 92.9% and rising.

Eurostat Data shows Ireland, Greece, Spain, France, Cyprus, Portugal, Belgium, Slovenia, and Finland all exceeded 3% budget deficit requirement in 2014.

France and Spain have been given warnings and extensions on numerous occasions.

Greece Sideshow

By any realistic measure, Greece is just a sideshow for what is to come.

Pater Tenebrarum at the Acting Man blog pinged me with this comment: "The true reason for the bust of Greece and other countries - apart from their truly atrocious socialist policies and abominable corruption - is fractional reserve banking. The euro has of course enabled an even bigger credit boom and bust than would have been the case otherwise, but it is not the fixed exchange rate that is at fault, it is the underlying economic policies and the monetary system as such."

While the politicians are are scrambling to "save" Greece, please note Italy's Non-Performing Loans Hit a New Record High.
The real danger to the euro area probably doesn’t emanate from Greece, but from two of its heavyweights, namely France and Italy. A small note in the European press reminds us that all is not well in at least one of these countries, least of all with its banks (currently this is only a “page 16 story”, but it has great potential to eventually move to the front page).

The note reads as follows: "According to Italy’s banking association ABI, non-performing loans amounted to 193.7 billion euro in May, 25.1 billion more than in the same month in 2014. This is the highest level since 1996. Non-performing loans represent 10.1 percent of all loans granted by Italian banks, ABI said on Tuesday."
Gigantic Accidents

Pater displays many other interesting charts and tables, concluding with ...
Greece is really a side-show. The euro zone remains full of accidents waiting to happen and some of them have the potential to become truly gigantic accidents. Italy has a twin debt problem and it is probably only a question of time before its giant government debtberg becomes a concern again – this would put the country’s banks into an untenable situation, given they have amassed a great deal of government since early 2012.

As long as the ECB continues to pump €60 billion in newly created money into the system every month, such problems can probably be kept at bay. However, this comes at a price, as monetary pumping distorts prices and falsifies economic calculation, which in turn leads to malinvestment and capital consumption that is masquerading as an “economic recovery”. The structure on which all this debt rests becomes ever weaker.
Illusion of Recovery

Papering over problems with cheap money, deficit spending, and give an illusion of recovery. To keep the illusion going, the ECB made Corporate Bond Purchases QE Eligible.

According to the ECB's Website is Italian utilities Enel SpA, Snam SpA and Terna SpA - Rete Elettrica Nazionale were on the updated list of QE eligible purchases.

What's next is anyone's guess, but anything needed to keep the illusion alive will likely be given serious consideration.

Mike "Mish" Shedlock

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