Europe’s Lagging Recovery Has Fueled A Massive Debt Burden

June 15, 2021

While China and the United States’ economies have seen a marked recovery following the pandemic, lagging vaccination rates and new viral variants have caused Europe’s economy to lag. The prolonged economic slowdown has forced governments across the continent to extend loan moratoriums, adding to already skyrocketing debt levels, potentially setting up a massive wave of insolvencies.

Governments across Europe have spent the equivalent of $1.8 trillion in loans, guarantees, and grants to keep companies afloat. While this has resulted in low unemployment rates and a drop in bankruptcies, the end of these loan programs could be a disaster in the waiting.

Countries like Italy, Spain and France have extended their loan moratoriums, but the Wall Street Journal notes that this is simply a postponement that does little to address the underlying problem. The WSJ cites a report from the European Systemic Risk Board that warns of a “tsunami” of insolvencies, which regulators fear banks are not prepared to handle. The head of banking supervision for the European Central Bank warns that 40% of eurozone banks have not properly recognized loans that are unlikely to be repaid.

Italy’s CNA, an association of small and mid-sized businesses, found that more than one-third of its members said they would be unable to start repaying their loans when the moratorium ends. In the tourism sector, fewer than 2% of businesses said they could survive past June if the moratorium was not extended.

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