Is it possible to live with a very high public debt ratio?

- "Some analysts believe that euro-zone countries facing problems with their public finances (Greece, Ireland, Portugal, Spain) will not succeed in reducing their fiscal deficits and in stabilising their public debts, and that the sovereign debt crisis will therefore resume."
- "We believe, conversely, that the efforts these countries have made, which are already visible, will enable them to stabilise their public debt ratios. Accordingly, we believe that we are not dealing with a short-term problem (continued high fiscal deficits, speculative attacks once again, default risk), but a medium-term problem: will these countries be able to live with a very high public debt, even stabilised, which will make it necessary to maintain a significant primary budget surplus, and hence a restrictive fiscal policy?"
- "The answer depends on the level of risk premia that these countries will have to pay and the political and social capacity to maintain restrictive fiscal policies. As examples, we look at the dynamics seen in the euro-zone countries where public debt ratios were high prior to the crisis: Italy and Belgium. These countries were able to implement a primary budget surplus of
6 percentage points of GDP. This is not very different from the order of magnitude needed in Greece, Ireland, Portugal and Spain if the countries’ risk premia (spreads over Germany) return to the level seen before the sovereign crisis."
- "However, if spreads remain at the current level, the permanent primary fiscal surplus needed to stabilise the public debt ratios would be huge (8 to 13 percentage points de GDP), and it is then very unlikely that the public indebtedness will be bearable in the medium term."

Natixis Flash Economics 424 20100830

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