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Result of pandemic will be debt, so how can eurozone manage it?

 

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Warning: President of the European Central Bank Christine Lagarde fears an economic contraction of much more than the predicted 7.5pc. Photo: Bloomberg

Warning: President of the European Central Bank Christine Lagarde fears an economic contraction of much more than the predicted 7.5pc. Photo: Bloomberg

Bloomberg

Warning: President of the European Central Bank Christine Lagarde fears an economic contraction of much more than the predicted 7.5pc. Photo: Bloomberg

The IMF has predicted that the Covid-19 crisis will see the eurozone economy contract by 7.5pc this year, while ECB president Christine Lagarde has warned it could be much worse - potentially falling by a staggering 15pc. Governments are trying desperately to offset the impact by borrowing unprecedented amounts of money to backstop businesses and support employees who have been laid off or furloughed.

Public debt is surging. With countries already highly leveraged in the wake of the global financial crash and the European debt crisis, it is worth considering how all this debt is going to be paid back. And what, if any, are the implications for investors?

At Davy, we believe looking back at previous episodes in history when governments have been highly indebted can help answer both questions. Several methods have been used in the past to reduce debt. These include what I would categorise as The Good, The Bad and the Ugly: