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Sunday, July 25, 2021

Covid debt could lead to new European sovereign crisis – warns expert

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According to a senior economist, the COVID-19 debt situation could easily turn into another eurozone crisis.

During the pandemic, virtually every country in the world suffered a severe economic blow. The rise in government borrowing and spending has driven up sovereign debt in many countries.

Deutsche Bank expert Sebastian Becker believes that many countries could become complacent and warned that a recovery from the eurozone crisis could occur if banks face financial difficulties.

He told The Telegraph:

A continued and careless buildup of debt can potentially lead to self-reinforcing loops of high debt and high risk premium, which do turn explosive at one point.

He added:

Should sovereigns face greater fiscal problems in the future, the ultimate holders of government bonds – ie to a large degree banks – would face financial difficulties, too.

This could in the worst case lead to a twin bank/sovereign debt crisis.

Since the end of 2009, due to the European sovereign debt crisis, more commonly known as the ‘Eurozone crisis’, a number of EU Member States have been unable to pay off their public debt.

The situation forced third parties, including other European countries and the European Central Bank, to bailout.

Mr Becker highlighted that despite robust growth, booming labour markets and a falling sovereign interest bill during the pre-pandemic years, most Governments have not been able to achieve balanced budgets.

He further noted that many advanced economies have never achieved a balanced budget on average for the past 30 years.

Mr Becker’s comments follow on from a fall in loan interest rates in the UK.

In May, households across the UK increased their borrowing for the first time in eight months.

Experts believe the rise in household borrowing has been exacerbated by those who have suffered loss of income during the pandemic.

It is estimated that around 6.3 million households have experienced a drop in income and have been forced to borrow.

Laith Khalaf, a financial analyst at the stockbroker AJ Bell told The Guardian:

Latest trends in consumer spending show that old habits die hard, unless there’s a lockdown in force.

Borrowing is on the rise, and savings are falling back, as the lifting of social restrictions has prompted consumers to reach for their wallets.

After a long period of hibernation, it’s natural consumers are enjoying a bit of the old normal, and many have built up a sizeable war chest of savings over the course of the pandemic.

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