Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
DatabankJanuary 2 2014

How much do Basel ratios reveal about European countries?

A new way of quantifying the effective management of sovereign debt shows eurozone economies in a new light.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Among the factors that influence the appeal of international financial centres (IFCs), macroeconomic data and the ability of a ruling government to manage its finances are two of the most significant. As emerging markets achieve greater economic stability and sustain higher gross domestic products, their financial hubs grow in size and relevance, attracting local as well as international business. On the other hand, IFCs in crisis-struck developed countries are impaired by macroeconomic imbalances and high levels of sovereign debt.

The Basel Institute of Commons and Economics has set out to measure just how effective governments in Europe have been in managing sovereign debt, moving the focus away from the traditional public-debt-to-gross domestic product ratio and onto a measure of public debt as a proportion of governmental revenues. This indicator, says the Basel Institute, shows how sustainable a country's fiscal policy is.

Striking a balance

A desirable ‘Basel ratio’ should keep its balance between debt and revenues or, even better, decrease over time. With this in mind, it is interesting to consider the Basel ratios of European countries over the past decade. While it has one of the highest in Europe, Italy's Basel ratio has remained relatively stable over the past 10 years, while the UK's has doubled in the same period. This points to good fiscal policies in the Mediterranean country and to tax-avoiding practises in the UK, says Alexander Dill, president of the Basel Institute. Mr Dill believes that these factors should be taken into consideration by rating agencies, which have downgraded Italy several times since the eruption of the eurozone crisis.

Mr Dill also suggests that looking at the Basel ratio would have helped in identifying risks within the eurozone. In 2009, Spain's Basel ratio reached 172%, up from 120% in 2008, similarly, Portugal's went from 201% to 245% and Greece's from 333% to 398% over the same period. Despite this, sovereign debt in these countries continued to attract the same interest rates as that of Germany, which had seen its Basel ratio increase only slightly, from 168% to 184%.

Basel criteria

Was this article helpful?

Thank you for your feedback!

Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
Read more articles from this author