The subject of sovereign debt, that is the debt that the state has, is hotly debated and the eurozone rules state that gross government debt should not exceed 60 per cent of the gross domestic product. Many countries are above that limit and some even exceed the 100 per cent threshold. This means that the debt of the state exceeds the value of the income generated by that state in a single year.
This gives rise to the statement that some countries are living well beyond their means. This is because an element of the gross domestic product would be generated thanks to activities that can take place only thanks to government expenditure, which would have occurred thanks to public sector borrowing. This is acceptable as long as there comes the time when the level of national income would have increased such that it no longer requires public sector borrowing to prop it up.
However, there is other data that needs to be looked at to understand the level of leverage that a country may have. This data relates to the level of savings and borrowings by households and businesses.
Data published by the European Central Bank shows that, in the eurozone, households deposits represent 63 per cent of the gross domestic product, while household loans represent 52 per cent of the GDP, leaving a balance of 12 per cent.
I believe that we are not really living beyond our means
On the other hand, the level of deposits placed by businesses represents 20 per cent of the gross domestic product and business loans represent 40 per cent of the GDP. The total net effect is -9 per cent of the GDP (because of an element of rounding off).
It needs to be kept in mind that a net minus figure represents a high level of leverage, that is a greater reliance on borrowing. A net positive figure would imply a low level of leverage, thereby indicating that a country is living within its means.
Each country has its own story to tell. For example, the net effect in Germany between deposits and loans of households and businesses is +1 per cent. It is typical of the Germans to balance their books even in this aspect.
However, there are some countries which are highly leveraged, and not only in the business sector but also in the household sector. One such country is Finland, where the difference between deposits and loans as a percentage of the GDP is -19 per cent. In the business sector it is -18 per cent, giving a net figure of 37 per cent.
Cyprus is another case, where the high level of leverage is attributable to the business sector. Although Cyprus has the highest level of deposits as a percentage of the GDP (136 per cent), they also have the highest level of loans (126 per cent). In the business sector, the difference between deposits and loans is -102 per cent of the GDP, meaning that the level of net borrowing of households and businesses is over 90 per cent.
The data on Malta is very interesting. The level of household deposits is 117 per cent of the GDP (the second highest is the eurozone), compared to a level of loans at 58 per cent of the GDP. This gives a net figure for households of +59 per cent, by far the highest in the eurozone.
The level of business deposits is 39 per cent of the GDP (second only to Luxembourg which, however, has a level of deposits nearly twice that of Malta). The level of business loans is 65 per cent of the GDP, giving a net borrowing figure for the business sector of – 26 per cent.
This means that in Malta, house-holds and businesses combined, have a low level of leverage, by far the lowest in the eurozone.
Just to get a sense of actual numbers rather than percentages, one notes that households in Malta have over €9 billion placed in deposits ranging from overnight deposits to deposits that have an agreed maturity above two years. This provides an indication of the stability of our economy and confirms my belief that we are not really living beyond our means.