By now we’re probably all familiar with the notion that Ireland’s financial challenges are different than Greece’s, but still a crisis in their own right.
Well here’s a key difference, and it can be applied to the latest wave of Eurozone nations at risk. Greece has a government debt problem and a budget deficit problem, but not a private debt problem. In contrast, Ireland, Portugal, and Spain have huge amounts of private debt relative to the size of their economies, with Ireland the worst off.
Yet some form of credit-fuelled overconsumption seems to have taken place in Portugal too. This is not to say that consumer spending has been particularly strong over the past decade or so. Rather, it is an observation that household consumption in Portugal expanded as rapidly as the euro area average, despite much weaker per capita income growth. In other words, before the economic fallout of the financial crisis, the Lusitanian economy exhibited excessively strong consumer spending relative to its fundamentals.
For once Greece comes out looking like a star.
(Via Morgan Stanley, Buying out Ireland and beyond, Elga Bartch, 28 Nov 2010)
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