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May 2, 2012
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This above dynamic is especially important for understanding Spain, where sovereign debt levels (at least those officially reported) are not particularly high. Spain’s housing bubble, however, continues to decline putting further pressure on private sector balance sheets. The public and private sectors cannot both successfully deleverage, in tandem, without destroying incomes and growth. Debts that cannot be repaid, will not be repaid. Private sector debts in periphery Europe, as well as the US and UK, must be brought back in line with incomes to support any sustainable future growth. The options for achieving this are either nominal income growth above debt servicing costs, debt write-downs, or a combination of the two. So far, policy in Europe seems to be attempting neither and the situation continues to worsen (unemployment is currently at a 15-year high). If there is any hope for a peaceful resolution of the Eurozone crisis, policy makers must begin to focus on correcting private sector debt imbalances. http://bubblesandbusts.blogspot.com/2012/05/private-debt-continues-to-drag-down.html

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