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April 20, 2014 6:08 pm
The eurozone periphery countries will have to pay more than €130bn this year just to meet the interest payments of their mounting debts, a servicing burden almost three times as high as the rest of the single currency area.
The figures – calculated by the Financial Times from International Monetary Fund data – underscore the deep wounds left by the eurozone crisis in spite of the high demand for peripheral eurozone debt in recent months.
Although falling bond yields have eased borrowing costs markedly over the past two years, weak economic recoveries and still-extensive budget deficits mean that the interest bill for Portugal, Ireland, Italy, Greece and Spain is still climbing.
“High debt levels and economic misery is clearly a political problem,” said Ebrahim Rahbari, a senior economist at Citi. “Even if we start to see their debt ratios stabilise and even start to tick down, they will remain extremely high for a long time, which means they’re very vulnerable to any further shocks.”
The figures, calculated from this month’s IMF World Economic Outlook database shows that the debt servicing burden of the eurozone periphery accounts for almost 10 cents in every euro of revenues received by the governments.
In the other 13 eurozone countries, the same burden averages only 3.5 per cent with the difference in the debt service burden between the indebted periphery and the rest of the zone forecast to rise over the next five years.
The high levels of debt service, even with lower interest rates, will erode highly indebted countries’ ability to make investments and maintain social security nets. For example, Portugal’s €7.3bn interest bill this year exceeds its education spending and almost matches its health budget.
The FT’s calculations estimate the debt servicing burden by comparing the overall annual deficit projected by the IMF with the primary deficit, which excludes interest payments on government debt.
“It’s going to be tough for many years,” said Antonio Garcia Pascual, a senior economist at Barclays. “Unless people start to think about radical solutions – effective pro-growth reforms, at one end of the spectrum, or debt restructuring at the other – these debts will be hampering growth and restrain government spending for years to come.”
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