Europe’s other debt crisis

By Lucy

In July 2012, Mario Draghi promised to keep the single currency. The yields on sovereign bonds have fallen which caused euro mess become chronic. Mr Draghi launched an inspection of the balance-sheets of the region’s 128 biggest banks this week. ECB officials and outside experts will peer into the banks’ balance-sheets and impose common standards for loan quality in order to find out which banks are viable now.

The origins of the euro disaster is more about excessive private borrowing than government profligacy. Most euro-zone countries have achieved less private-sector, for three reasons. First, the financial limitation imposed on Europe’s economies deepened their recessions, which made it harder to reduce private debts. Second, small banks did not want to recognise non-performing loans. So they make provisions for them. And third, European bankruptcy law is helpful for restructuring debt.

According to the IMF, the influence on Europe’s growth from private debt is larger than government debt. One necessity is for banks to recognise, and write down, non-performing loans. In addition, more honest assessment of banks’balance-sheets must translate into a willingness to sell or restructure mortgages and corporate loans.

Dealing with the private-debt trap should be a priority for Europe’s leaders.Mr Draghi is fighting to start clearing up.

http://www.economist.com/news/leaders/21588366-its-not-just-sovereign-borrowing-there-are-too-many-zombie-firms-and-overindebted