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Corporate debt: when cheap is expensive (can akat/iStockphoto)
Corporate debt: when cheap is expensive (can akat/iStockphoto)

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Will decade be an 'economic rerun of the 1970s'? Add to ...

These are stories Report on Business is following Wednesday, May 9, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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The long decade As Europe struggles and plunges ever deeper into uncertainty today, Société Générale makes an intriguing comparison to the 1970s, sans the inflation.

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"The 2010s are going to be an economic re-run of the 1970s, but with much higher levels of both public and private sector debt across developed economies," said Kit Juckes, chief of foreign exchange at the European bank.

"But while the music won't be as much fun, the retreat of trade unions and the march of globalization mean we can also do without the inflation that accompanied the 1970s. That makes getting debt levels under control harder, but it makes keeping interest rate levels down easier."

There are, of course, extreme differences between the 1970s and now - as Mr. Juckes puts it, other than hair, Bowie and the Grateful Dead, and more related to inflation and the severity of debt levels.

But overall, he looked at the latest work by Carmen Reinhart and Kenneth Rogoff, who studied 26 high-debt periods, and how they average 23 years, with slower growth to the tune of about 1 per cent.

He also looked at a chart produced by another economist that studied economic growth in Britain, and attempted to put in terms of Europe and the United States.

"Broadly, growth was much weaker in the 1970s and will be in the 2008-2016 period," he told me.

"It seems to me about right to assume that we are in a long (let’s call it 23 years +/- 10 years) of ‘debt crisis’ which will see growth 1 per cent slower than before, ie, say 1 per cent in Europe and the U.K., and 1.5 per cent to 2 per cent in the U.S."

The report came as developments in the embattled euro zone, or lack thereof, highlighted the problems of the post-crisis era.

Greece, of course, remains the focus overseas, amid a political stalemate that threatens its debt payments, its rescue, and even its membership in the 17-member euro zone, as The Globe and Mail's Brian Milner writes in today's Report on Business.

Again, fears are spreading, with a wary eye also on Spain, whose bond yields spiked today.

It's the second-day of a mandated three-day attempt by the leader of a Greek leftist party, which ran a surprising second in Sunday's election, to try to form a coalition government. Notable is that his group wants to rip up the agreements that were struck to rescue Athens.

However, it appears unlikely he'll be able to pull it together, likely meaning further elections in June. Greece is expected to get most of its next bailout tranche, regardless, with just some held back.

"In Greece the game of high stakes poker between the various politicians striving to form a government and the EU continues to play out in the full glare of the market's gaze," said senior analyst Michael Hewson of CMC Markets.

"Financial markets have come to know a new player on the Greek political scene in the name of Alexi Tsipras, leader of the left wing Syriza party, who is trying to form a government in the wake of the weekend elections," Mr. Hewson said in a research note today.

"He has pledged to tear up the bailout agreement declaring it 'null and void,' while also insisting that Samaras and Venizelos revoke their pledges to the EU with respect to the bailout agreement. Neither leader seems inclined to do this. Tsipras has another two days to try and form a working government and while he is unlikely to succeed the fact that his party finished second in the polling shows the discontent within Greece at this moment as austerity measures continue to crush the economy."

The angst is being felt across the continent and rippling through global markets.

"With concerns about the solvency of Spanish banks rising in the wake of the Bankia story and the impending likelihood that ratings agency Moody’s could start cutting credit ratings on a raft of European financial institutions, the prospects of more stress in the European banking sector looks set to increase," Mr. Hewson added.

Germany powers ahead As The Globe and Mail's Kevin Carmichael writes today, there's no stopping the economic engine that is Germany.

Despite the troubles of the hobbled euro zone, Germany in March boosted exports for the third month in a row, its trade surplus widening to €17.4-billion from €14.9-billion in February.

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