The Czech corporate sector is most at risk of a possible debt crisis. Czech firms’ debt could significantly rise if EU subsidies or investments are reduced. However, Czech firms are not one of the sixteen risky areas that could become the epicentre of the next debt crisis in Europe. These are the conclusions of Deloitte’s “When is the next crisis coming?” analysis assessing the risk of European households, governments and firms running up debt and countries incurring foreign debt.
A detailed analysis of the Czech economy shows that its position in all four areas is relatively healthy from the perspective of debt. Only the corporate sector deserves some attention. “Without a significant volume of subsidies and given the existing investment activities, the corporate sector’s debt could continue rising. Nevertheless, the starting low level of debt and the slow trajectory of debt growth have so far mitigated any concerns,” says David Marek, Deloitte’s Chief Economist.
Deloitte’s analysts shows the situation is risky from the perspective of household debt in six European countries: Greece, Cyprus, Lithuania, Poland, Romania and Finland. The European corporate sector is in good condition in terms of debt everywhere except for Cyprus. However, it is a highly specific country as a great number of foreign firms have their registered offices there for tax reasons.
Government debt poses a threat to the economies of four European countries: France, Italy, Portugal and the United Kingdom. If the governments in these countries do not adjust their fiscal policies, the ratio of debt to GDP will keep growing.
“Besides chronic public finance deficits, these countries are also suffering from slow economic growth. In the United Kingdom, the economy’s growth rate may be adversely affected by Brexit, which additionally exacerbates the issue of government debt sustainability,” adds Václav Franče, Deloitte’s economist. “In contrast, following a decade of debt write-offs, austerity measures and bridging loans, Greece’s public debt has a sustainable trajectory. However, it needs to be added that this is only thanks to the bailout loans bearing low interest rates.”
Five countries failed the foreign debt sustainability test, including Cyprus and the United Kingdom.
To read the full “When is the next crisis coming?” analysis in Czech, follow this link.