Why are Eurozone countries still so indebted?

What do Germany, Malta and the Netherlands have in common? They’re the only three eurozone countries that have lower debt burdens than they did in 2008, according to a new Moody’s report.

This might be something of a surprising result, coming a few years after a sovereign debt crisis in which it became clear that market appetite for these assets could suddenly evaporate, throwing the entire basis of the modern bond-financed-society into question.

It makes more sense when you factor in growth levels, inflation and central bank behaviour; countries are also less indebted than at their peak levels over the past decade.

The rating agency goes on to argue that debt to GDP levels are unlikely to fall in the next few years. In its list of factors that might affect government leverage, it finally points to:

The end of new purchases of euro area sovereign debt under the European Central Bank's Public Sector Purchase Programme from 2019 onwards will force the most indebted euro area sovereigns to rely again fully on funding from foreign and domestic private investors.

The report neatly conjoins two central and seemingly opposed themes in recent European history: the impetus to constrain government borrowing, which gathered pace post-crisis, and the efforts of an independent central bank to stoke inflation by ... purchasing government debt.

The European Central Bank (ECB) held €2.2tn of government bonds as of the end of December. It is impossible to guess the extent to which borrowing costs across the continent in every conceivable asset class have been distorted by its actions, beyond saying: to some extent (or: very much so).

Moody’s then moves on to bank deleveraging (bearing in mind that domestic banks provide significant demand for sovereign debt), squaring part of the circle:

Public finances remain fragile in a number of countries and are unlikely to significantly decline over the next two years. The capacity and willingness of domestic banks to finance government debt depends primarily on the size of the banking system relative to the government's gross borrowing requirements and the size of deposit inflows available to fund net borrowing requirements. Qualitative factors drive banks' willingness to lend, including a government's policy credibility and perceived risks to macroeconomic stability. The regulatory environment, including incentives to hold government securities, can affect both willingness and capacity.

The non-regulatory incentives are very high once stimulus measures are considered. But the ECB’s actions are starting to look a bit like pushing the pause button on economic history. It's worth stepping back and trying to assess the trade-offs of the past and future, in a world where debt was the villain of the last crisis, but the presumed hero of a monetary-policy centred attempt at recovery.

By this point, back at Moody's, it’s all sounding a bit déjà vu:

... household indebtedness has stabilised at pre-crisis levels, but it remains high and is even increasing in some European countries. Elevated private sector leverage is negative for banks, because it not only puts them at greater direct default risk related to their exposures but also to a potential economic slowdown and deep asset price corrections. If a country's financial system has a low ability to absorb shocks, significant asset impairment may result in bank failures and require a costly government intervention to recapitalise the banks.