Debt: The potential time bomb

A rising amount of debt has been a strong feature of developed economies, including Greece, in recent years. Businesses and households find it easy to borrow more, and they make full use of this new possibility. Does it reveal ignorance of danger, or does it show sheer optimism for the future? Whatever the case, the statistics tell the true tale: Although still at relatively low levels, the total debt of Greek households has doubled in recent years, while the debt of Greek firms has reached 40 percent of GDP. Blessing or curse, the current potential for borrowing may evolve into a time bomb under certain circumstances. Greek firms are fast catching up with the borrowing pace of households, which between 1998 and 2001 doubled their debts in relation to available income, from 9 percent to 18 percent. Admittedly, this is not a high rate. In the eurozone, it is 59 percent and in the USA 100 percent. But the rate at which loans have been rising in Greece in recent years is very high, and according to all indications, it will continue to increase rapidly. Paradoxical as it may seem, the trend of fast-rising loans, which poses considerable risks, is the result of a factor of stability; namely, the fall in inflation which brought about lower interest rates. The lower cost of loans means that firms and individuals are not afraid of debt. Especially for businesses, the stock market’s boom allowed for the proliferation of many grand plans which were largely based on the assumption that they could raise new funds at no cost on the bourse. The subsequent, sharp decline of stocks simply boosted debt as budgets had to be financed through borrowing. On the other hand, households are easily enticed by the low cost of loans to borrow in order to maintain or raise their standards of living, even though incomes may be falling. Nevertheless, in Greece, two-thirds of loans to individuals are mortgages, whose value is more than matched by that of real estate put up as security. But if these properties were sold for the mortgages to be repaid, the value of real estate would fall drastically and the debts could not be covered. However, a rapid increase in the debt burden can become an obstacle to growth. An ever-increasing part of available income is directed toward repaying loans rather than toward consumption or investment. Moreover, if stock market values continue to flag, many loans taken out during the period of excessive optimism may prove difficult to service. Indeed, if the recession in some sectors deepens, not even further interest rate cuts will be sufficient to generate a turnaround. Of course, there are counterarguments. Higher borrowing, which is an international phenomenon, makes recessions milder; in the absence of easy borrowing, the consequences of recessions would be violent. On the other hand, even if cheaper borrowing keeps the economy alive, no one can claim that it can lead it to recovery. The total debt of Greek firms has risen from 15 percent of GDP in 1997 to 40 percent now, Pavlos Mylonas, head of strategic planning and analysis at the National Bank of Greece, points out. And the trend is rising, as the respective rates in the eurozone and the USA are 50 percent and 42 percent. The reason why European firms have a higher debt burden is that American businesses can more easily raise funds on the stock market or through private placement. Even if we accept that the total debt of Greek enterprises is not near danger levels, it must be realized that a rising volume of borrowing is not always followed by a rise in turnover. The sales of Greek firms as a percentage of total capital employed fell from 81 percent in 1996 to 55 percent in 1999. At present, companies are still able to service their debts but if they are not able to see higher profitability in the fairly near future, then any problems could turn serious.

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