An ever-growing private debt ratio comes at a cost

Nathan Thuille

         At the end of 2019, the Bank of France valued the non-financial private sector debt ratio at 119.0% of GDP in the Euro Area. Six months later, it skyrocketed to 127.6%.

First and foremost, economics teaches any student that innovation requires private debt. To do so, the non-financial private sector (corporates, households, small businesses, etcetera) turns to two different institutions, banks to take out loans or the financial market to issue a private bond. According to the Sixpack that contains macroeconomics objectives whose EU members are required to follow, the EU economic governance limits the NFPS sector debt to 160% of the national GDP (compared to the 60% limit enforced to the sovereign debt).

Even if the European average resides above the 160% ratio objective, the wealthiest countries in the EU are moving towards it dangerously. For example, France’s private debt accounted for 150.2% of its GDP, approximately like Great Britain (149.4%).

Without a doubt, the global pandemic and the consecutive lockdowns of European economies have accelerated this high-risk trend gravely.

At the dawn of a huddled-up Europe due to the British Covid-19 variant, indebted EU members must conform to the Sixpack’s requirements or else.

An excessive non-financial private sector debt ratio: an index to forecast unproductive branches of the economy?

         The subprime crisis in 2008 and its catastrophic impacts on the European economies are still in force today. In 2007, the unsolvable indebted American households were at the core of the most dramatic decline in global GDP ever in modern history. Casually, a household taking on debt to buy a property is not problematic. However, it could be an issue for the debtor when one cannot pay interest and amortization when due. When it happened, it had caused a real estate crisis followed by a financial crisis. Subprime products were (casually put) debt bonds made out of the millions and millions of mortgages contracted by the general public. Private debt seems to have replaced those mortgages (graph. 1).

These days, could the non-financial private sector debt be the next core of a systematic crisis?


The Euro crisis that followed the 2008 crisis left the European Union shattered. Among all members of the Eurozone, Greece was the one that suffered the most. Unfortunately, the Greek experience has demonstrated what were the downsides of high private debt during a recession. At the peak of the crisis (late-2011 to mid-2013), both Greece’s sovereign and private debt had heightened (graph.2), extreme unemployment (graph. 3), peaking bond yields (graph. 4: GGGB3M was at 55.78% in 2011, 36.59% for the GGGB10Y in 2012), Greece was in a never-ending spiral of pessimistic forecasts and Greek households and companies were drowning in debts. Thanks to the enormous liquidity made available to European banks by the ECB in 2007-2009 that continued to lend massively to Greece (to the private sector and the public authorities).

Graph. 2
Graph. 2 : Private debt ratio to GDP in Greece
Graph. 3 : Unemployment in Greece
Graph. 4 : Greek Bonds Prices

Thus, highly indebted households and companies went bankrupt, and unpaid loans were transferred to taxpayers (principle of privatization of profits and socialization of losses that works ideally best in a solvable economy). Currently, Greece has one of the most massive debt to GDP ratio worldwide, yet, national non-financial private sector debt has dropped drastically (graph. 5).

Graph. 5 : Greece's actual indebtment

Therefore, a high private debt handicaps productivity and undermines economic gross. In Europe, Greece has showcased how unproductive companies are getting “zombified” by EU member’s abundant liquidity (Germany and its bankers were Greece’s largest lenders).


The COVID-19 outbreak and its backlashes on the European economy forced countries to support companies affected by the sanitary crisis. Greece has implemented such a policy yet modestly compared to its European allies.

High corporate debt: a “Zombification” of the economy.

Greece was our starting point: it showcased how an ever-increasing private and public debt ratio to GDP could become a systemic issue. Thus, the indebtedness of households and companies in Europe presently represents a systemic risk factor, a fortiori considering the macroeconomic consequences of the Covid-19 pandemic. To avoid the collapse of the economy and thus the depression, the European states generously distributed state-guaranteed loans without discriminating between viable companies and zombie companies. Nevertheless, the government support mechanism ignores moral hazard and opportunity cost, and therefore efficiency, hence the risky misuse of scarce financial resources. In other words, by taking on debt, the government ignores the Ricardo-Barro effect (cf. quote), and in this hypothesis, the expansionary fiscal policy financed by a loan would not influence real variables such as GDP or employment.

"In the case where the marginal net-wealth effect of government bonds is close to zero ... fiscal effects involving changes in the relative amounts of tax and debt finance for a given amount of public expenditure would have no effect on aggregate demand, interest rates, and capital formation."

The Zombification of companies was handicapping Greece in 2013 (midway through its unfinished crisis) yet is taking the most influential EU members by storm.

Bankruptcies in Greece for the last decade
Number of zombie firms by country (OECD)

Companies that are “zombies” are being kept artificially alive by the repeated extension of credit. According to Natixis, the lower the rent of money is at a given period, the higher the share of “zombies” will be four periods later. And the lower the banks’ ability to digest losses (as measured by their price/net asset ratio), the higher the “zombification.”

Correlation between interest rates and "zombie" firms (Natixis)

In Europe, the non-financial private sector debt is held mostly by companies (graph. corresponding), plus during the recent pandemic, SMEs and SBSs were substantially assisted by European governments, treating them as the backbone of the economy. In Spring 2020, Germany decided to suspend the obligation to file for insolvency (France had a similar policy) until September but extended it to the end of the year. 

Thus, in addition to the large amount of state’s guaranteed loans made available to already largely indebted SMEs, the exogenous crisis forced the healthiest country in Europe to call off bankruptcies until 2021. According to Munich’s Institut für Wirtschaftsforschung, 2021 could be a disastrous year for businesses: 96 percent of the survey participating economists think that the number of Zombie companies will increase in 2021. The business information agency Creditreform predicts a significant increase in insolvency proceedings, up to 24,000 in 2021 in Germany and 10% of Austrian companies (around 50,000 companies).

A possible risk for 2021?

Zombies companies are not new in Europe. According to Natixis, since the 2008 Crisis, the number of liquidity-fed companies has risen to unprecedented highs.

"Zombie" firms situation in Europe (Natixis)

Assuredly, “zombie” companies emanated from perishing sectors where productivity and innovation were shallow. However, in 2020 healthy sectors were exceptionally impacted (tourism, catering, cultural, and events industry), leading to a forecasted explosion of “zombies.”

Thus, European economies will have to reallocate a more substantial portion of capital and labour than before. If no reallocation is made and if companies’ debts continue to stack up, will countries’ growth be impacted in the incoming years?

Sources :

Podesta, A. and Tsoni, M., 2020. State aid: Commission approves €1.2 billion Greek scheme providing grants for SMEs to support economy in coronavirus outbreak. [online] European Commission. Available at: <>.

Johnston, M., 2020. Understanding the Downfall of Greece’s Economy. [online] Investopedia. Available at: <>.

Falagiarda, M., Prapiestis, A. and Rancoita, E., 2020. Public loan guarantees and bank lending in the COVID-19 period. [online] European Central Bank. Available at: <>.

Banque de France. 2020. Increase in the private debt ratio in the euro area. [online] Available at: <>.

Jones, C., 2020. European Zombification becomes even scarier. [online] Financial Times. Available at: <> [Accessed 6 February 2021].

Les Echos, 2021. Sociétés « Zombies »/Eurozone : Des mortes bien croissantes. [online] Les Echos. Available at: <>.

Vittori, J., 2020. Les entreprises zombies, grandes gagnantes de l’épidémie. [online] Les Echos. Available at: <>.

Brzeski, C. and Ernst, L., 2020. Germany: Insolvencies – a risk to the 2021 outlook. [online] ING Think. Available at: <>.

AFEP, 2017. Trois regards sur la dette privée en Europe. [online] Afep. Available at: <,%C3%A0%20350%20%25%20du%20PIB>.

IFO, 2020. An Undesirable Side Effect of Coronavirus Measures: Zombies?. [online] Available at: <>.

Federal Statistical Office, 2021. October 2020: business insolvencies down 31.9% from October 2019. [online] Federal Statistical Office. Available at: <>.

Weinhofer, G., 2021. Zombie-Unternehmen. [online] Creditreform. Available at: <>.

Artus, P., 2020. La multiplication des entreprises zombies est un vrai problème. [online] Natixis. Available at: <>. 

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