##it effect ( the hit to the european economy is a real gdp decrease of around 0. 5 % over the next three years, but this is a very early forecast ). 3. last but not least, political risks have increased, posing a challenge to fiscal and structural reform implementation. rising political uncertainty ( especially in spain, portugal, greece, italy and france ) and increasing support for populist political parties which seem to be less reform - oriented and with eurosceptic credentials contribute to the downside risks to debt sustainability in the euro area. of course, in the aftermath of the british referendum the biggest political risk to the whole of europe is brexit. brexit represents a shock to the institutions and norms that underpin markets. thus, brexit is different from the euro break - up fears of 2012, the global financial crisis of 2008 or the bursting of the high - tech bubble of 2001. it is not financial contagion, as in 1998, or this february. instead, it represents a contagious political development. no matter whether we have a full - blown or a light brexit, the political risk for the rest of the continent is that the referendums will mushroom across europe in a tug - ofwar between populist forces and the political establishment and elites. this risk is particularly heightened for countries with strong anti - european sentiment such as hungary, the netherlands, denmark, even france. there is an old saying in brussels that europe ’ s leaders are known to have a tried - and - tested method for coming up with policy fixes when forced to cope with emergency situations. postbrexit europe has the potential to become an emergency in the not - too - distant future. i only hope that this time is not different. times will tell. bis central bankers ’ speeches

john iannis mourmouras : a post - brexit assessment of risks to debt sustainability in the euro area speech by professor john iannis mourmouras, deputy governor of the bank of greece, at the third omfif main meeting in north america, st. louis, 14 july 2016. * * * views expressed in this speech are personal views and do not necessarily reflect those of the institutions i am affiliated with. this is an abridged version. the 2008 global financial crisis has led to a rapid accumulation of government debt in most countries of the euro area. indeed, the euro area government gross debt - to - gdp ratio is estimated to have risen by 28 percentage points from its pre - crisis level in 2007 to stand at 93 % in 2015. however, financing concerns are currently mitigated by low sovereign funding costs for almost all sovereign rating categories and solid demand for government bonds against the backdrop of the eurosystem ’ s ongoing asset purchase programme ( qe ). total debt service of euro area governments for the next 12 months is around 16 % of gdp ( around €1. 6 trillion ), a figure which comprises 13. 9 % of principal and 2. 1 % of interest expenditure. it is true, however, that despite the fact that debt servicing is much easier today given that lower nominal interest rates worldwide are reflected in reduced coupon payments, risks to debt sustainability are on the downside, as reminded in the latest ( pre - brexit ) ecb financial stability review ( may 2016 ). our objective here is to examine if and how, after the brexit vote, these risks are indeed heightened. i identify below three such downside risks to debt sustainability in the short - to medium - term, in the aftermath of the british referendum. 1. a low interest rate environment, the new global norm, due to persistently low inflation, increases the disincentive to fiscal consolidation and structural reforms. for instance, negative nominal yields, if applied too long, may act as an anaesthetic to euro area governments. the fiscal space gained from lower debt service costs may slow enactment of necessary fiscal and structural reforms. brexit could well amplify the above downside risk. the initial market reaction to the brexit vote was a typical risk - off mode – lower curves, wider spreads, flatter curves. the uk 10 - year gilt yield fell under 1 % for the first time in records, while