How Indebted Are Three Seas Countries? 

Most of the Three Seas countries are not heavily indebted. However, they are importers of capital, which must be taken into account when making economic policy decisions.

A man puts a stack of euro cash notes in his wallet
The issue of debt is always a hot topic on the economic agenda, currently with particular resonance in the Three Seas Region. Photo: Andrey Gonchar /

The issue of debt has been a hot topic on the economic agenda for a long time. Most frequently, those who discuss this issue define indebtedness as the level of public debt. Less often, particularly in the case of poor developing countries, it is interpreted as the level of foreign debt.

The issue of private debt is the least popular indebtedness debated in economic, social, and political discussions. Why do we speak most frequently about public debt? Most probably because it is a challenge for numerous countries in Europe. It is also most intuitively identified as a negative phenomenon.

If we look at public debt only, we can see that in most of the countries in our region, the level of public debt is much below Germany, which we use as the “European Benchmark”

Foreign debt is an issue in European countries to a much lesser extent. Although the Greek case of 2011 proved, it may also be a problem on our continent. Understanding the nature and assessment of private debt is much more blurred. On the micro level of either individuals or companies, its high level is definitely a challenge.

It may also be a challenge on the macro level, particularly when a large share of indebted individuals lose their ability to service it. The US case of the subprime mortgage crisis of 2007-2010 is the most recent example of the catastrophic macroeconomic outcome of excess private indebtedness. On the other hand, large private debt can simply be a symptom of well-developed financial markets.

Are the debt levels in the Three Seas region a challenge?

If we look at public debt only, we can see that in most of the countries in our region, the level of public debt is much below Germany, which we use as the “European Benchmark.” As of 2020, it varied from 19% of GDP in Estonia and 25% in Bulgaria to 79% in Hungary, 80% in Slovenia, 83% in Austria, and 87% in Croatia. None of the region’s countries have public debt levels that are even close to the Southern European countries, like Greece (206%) and Italy (155%). Among all European countries, only Luxembourg (25%) has a debt level close to Estonia or Bulgaria.

It can be challenging for countries such as Croatia, Hungary, and Slovenia, but it does not have to. As always in economics, much depends here on other factors. Even low public debt can be a challenge if the economy does not grow fast enough to generate enough tax revenues to repay or – worse – service it.

And the other way around, a high but reasonable level of public debt does not necessarily mean the country will default soon. High real or even nominal (thanks to inflation) growth rates, low-interest rates, and a low share of debt denominated in foreign currencies can be enough to keep the situation on the safe side.

Accounting for private debt

Adding private debt brings only minor changes to the general picture of indebtedness of our region. Both its private part and the total debt are the highest in Germany and Austria. Private debt is also relatively high in Estonia, but thanks to an extremely low share of public debt, it moves the country only slightly upwards in the total classification of indebtedness. Croatia, Slovakia, Hungary, and Slovenia are again on the top of the list of most indebted “post-communist” countries.

The interpretation (the economic meaning) of the level of private debt can vary from country to country depending on its maturity mix, the effectiveness of allocation of assets, and the exchange rate structure. Most probably, in the cases of countries like Austria, Germany, and Estonia, the high level of private debt indicates well-developed financial markets.

On the other hand, in the case of Romania, Lithuania, or even Poland, relatively low levels of private debt have both positive interpretations (i.e., a robust banking sector) and negative interpretations (i.e., underdeveloped financial markets). As is often the case in economics, comparisons based on a single indicator are not enough to draw meaningful conclusions. And yes, some commentators tend to forget this fact. Let’s not follow their example.

A challenge for foreign investors

In general, however, any level of indebtedness can be a challenge if foreign investors hold a large part of this debt. It usually means a high vulnerability of the debt to fluctuations in exchange rates; it can also mean that the availability of financing strongly depends on the assessments of our economy by the global financial market, its risk attitudes, but also on its more general moods. Therefore, one should also look at the last factor: how much of the debt, be it public or private, is foreign debt.

As the specific data on the residence of the debt holders are quite complicated to obtain and often lacks comparability among countries, we use a proxy. We look at the Net International Investment Position (NIIP), which is the balance of the payments indicator reported by Eurostat for all EU economies. NIIP is an analysis of the difference between the assets local residents keep in foreign countries and the assets foreign residents keep in a country. So this shows if a country is an importer or exporter of capital on global markets.

Challenges facing countries with negative NIIP

The lower (more negative) the NIIP, the more vulnerable the country could be to financial markets shock and changing attitudes of global investors. Most post-communist countries in our region are net importers of capital. Their NIIP varies from more than minus 60% of GDP for Slovakia to minus 7% for Slovenia. Only two countries in the group analyzed are net exporters of capital, and, not surprisingly, these are Germany and Austria.

The legacy of communism can explain our region’s need to import capital. However, significantly negative NIIP levels are also recorded in other (mainly southern) European countries such as Greece (minus 175% of GDP) and Spain (minus 70%), but also Ireland (minus 139%).

As such, a negative NIIP does not have to be read as a dangerous phenomenon. It can just be a consequence of the stage of economic development of the country. It can, however, be a serious challenge if accompanied by high total indebtedness and/or low efficiency of financed assets.

If we look at three seas countries, there are three with (relatively) high total indebtedness and significantly negative NIIP: Slovakia, Hungary, and Croatia. It does not mean that they are currently at any risk. Both the level of total debt and the negative NIIPs they record are much below the “dangerous” levels found in southern European countries such as Greece, Spain, and Portugal.

Current (in the case of Slovenia) and future (in the case of Croatia) membership in the Eurozone additionally decreases the potential risks for these two countries. However, the challenges are more acute for Hungary, which is also vulnerable in terms of challenges related to exchange rate stability.

To sum up, one cannot consider the countries of our region as heavily indebted. The governments and central banks in these countries should, however, take into account that they are capital importing economies. It means the debt levels they can safely handle are lower than for most of western Europe.

Mateusz Walewski

Chief economist of BGK (Bank Gospodarstwa Krajowego) since 2018. Previously worked among other for PwC and CASE - Center for Social and Economic Research. Participant of numerous research projects and advisory services for the private sector and governments across Central and Eastern Europe. Member of the Team of Strategic Advisors to the Prime Minister of Poland in years 2008-2010. Author of publications and consultancy reports on macroeconomics, labor market and social policy issues. A graduate of the University of Warsaw and the University of Sussex.

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