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Eurozone debt hits 90% of economy

Five countries in recession;
 business activity drops

- Associated Press - Wednesday, October 24, 2012

LONDON — In spite of years of harsh spending cuts and tax increases, Europe's debt problems are getting worse.

The European Union's statistics office, Eurostat, reported Wednesday that, at the end of the second quarter, the total government debt of the 17 countries that use the euro was worth 90 percent of the group's total economic output for the year. That is the highest level since the euro was launched in 1999.

The rise from the previous quarter's debt-to-GDP ratio of 88.2 percent, and the previous year's equivalent of 87.1 percent, is a result of the eurozone's economic problems – which are making it harder for countries to handle their debts.

"The euro-area economy remains stuck in a rut," said James Ashley, senior European economist at RBC Capital Markets.

According to Eurostat, five of the countries that use the euro are in recession – Greece, Spain, Italy, Portugal and Cyprus.

Many analysts expect the eurozone to slip back into recession in the third quarter of the year, when official figures are published next month. A recession is technically defined as two quarters of negative growth in a row.

Other figures Wednesday pointed to a deepening economic crisis in the eurozone.

The purchasing managers' index – a gauge of business activity – from financial information company Markit fell from the previous month's 46.1 to 45.8 in October – its lowest level in more than three years. Any figure below 50 indicates a contraction in activity.

Meanwhile, a closely watched survey from the economic research group Ifo Institute found that business confidence in Germany, Europe's biggest economy, dropped for the sixth month in a row, confounding expectations of a modest increase.

Ifo's key figure for October dropped to 100, from 101.4 in September.

Germany has been the main reason why the eurozone has not fallen into recession.

The country's powerhouse exporters, such as Volkswagen and BMW, have taken a slice of rising trade volumes around the world while its consumers have shown an increasing appetite to spend.

But Germany's economy recently has lost its momentum as the debt troubles on its doorstep have weighed on economic confidence.

A shrinking economy makes the value of a country's debt as a proportion of the size of its economy worse.

For example, Italy's debt burden has risen from 123.7 percent in the first quarter to 126.1 percent in the second quarter, while its economy has shrunk for four straight quarters.

Greece's finances, though, are in a league of their own.

The country, which is struggling to convince debt inspectors that it's fulfilling pledges it has made in return for billions of dollars worth of bailout cash, saw the biggest quarterly increase in its debt burden, to 150.3 percent of national income, in the second quarter from 136.9 percent in the first.

The increase comes despite a dramatic fall in debt in the first quarter after Greece had negotiated a deal with private bondholders to accept a write-down of their Greek holdings. The country's debt was reduced to $364 billion in the first quarter from $443 billion in the second quarter of 2011 as a result of the write-down.

But any advantage gained is slowly being whittled away by the country's deep recession, which appears headed for a sixth year.

Interest on the debt, as well as continued budget deficits, pushed the debt back above $390 billion in the second quarter of 2012.

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