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

percent. 4 ladies and gentlemen, you will agree these are good numbers. asset quality is satisfactory with gross npl ratio at 4. 7 percent as of end - december 2016 ( better than the average in the last five years ) while capital adequacy ratio ( car ), as a measure of riskbased capital, remains well above the minimum bsp and international standards. for instance, the car of stand - alone thrift banks was at 19. 7 percent as of june 20165 in terms of profitability, industry figures were also better. net income for 2016 reached p13. 9 billion, higher by 17. 8 percent than in 2015. return on equity ( roe ) improved to 10. 5 percent. the role of thrift banks in countryside development 1 / 4 bis central bankers'speeches in other words, ladies and gentlemen, the thrift banking industry is well - placed to support countryside development moving forward as reflected in your convention theme “ maximizing opportunities in countryside development. ” that you have aligned your program with the government ’ s 10 - point socio - economic agenda of promoting countryside development is both commendable and timely. just recently, the government approved the philippine development plan ( pdp ) 2017 – 20226. the objective is to reduce overall poverty rate to 14 percent and poverty incidence in the rural areas to 20 percent by year 20227 by promoting inclusive growth. i am glad therefore that you have a special forum on the philippine development plan later today. this will help you determine your roadmap moving forward. meeting the challenges / pushing msmes there are many opportunities to help develop the countryside, particularly within your targeted niche of catering to the msmes. the msme sector is a cornerstone of economic growth. we have seen how successful msmes liberate people from poverty by creating jobs and serving as catalysts for growth in their communities. this is the rationale behind bsp ’ s continuing collaboration with the industry and other agencies of government to create an enabling regulatory environment for increased access to finance, particularly for msmes. among the challenges that we have helped address include : 1 ) the use of collateral and developing product lines ; 2 ) the difficulty to expand reach, given our archipelagic configuration ; 3 ) the competition from the “ big boys ” and now the advent of asean integration ; and 4 ) the changing external macroeconomic environment. addressing collateral on the issue of collateral, the bsp initiated in 2008, the credit surety fund (