Back to the future

23 November 2010

European countries might squabble over bailouts for their weaker members, but retirement promises will eventually make even the strongestlooking euro zone members look shaky. The big political question is whether bondholders will share the pain that pensioners are bound to feel.

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A report by the ratings agency Standard & Poor's on the effect of ageing population, published on Oct. 7 estimated that the median level of agerelated spending in Europe will increase to 26 percent of GDP a year by 2050, resulting in median total debt levels of over three times GDP by the same date.

On Nov. 9, an S&P country report on Austria, whose balance sheet is relatively healthy, predicted costs related to the country's ageing population would lead to the loss of its AAA rating by 2020 and a decline to junk by 2035, in the absence of fiscal rebalancing measures.

According to a study produced for the European Central Bank by the University of Freiburg, Germany's gross state pension liabilities including government employees stand at 330 percent of GDP while the equivalent figure for the UK is approximately 180 percent of GDP.

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