Eurozone crisis

The crisis

The basic problem

As a matter of arithmetic, the public debt owed by a government that continued to run a budget deficit every year, would eventually become so large that the interest on it would be more than could be raised by taxation - and the larger the deficits, the sooner would that point be reached. In practice, that process is hastened by the fact that government debt is traded in a well-informed market. Operators in that market would be aware of the approach of the point at which the government would be unable to pay the interest on its debt, and would be increasinly reluctant to allow that government to continue to roll-over its debt. That reluctance could be overcome by offering them higher interest on future loans, but that would hasten the process and increase the reluctance of further potential investors. That is what is known as the "debt trap".