Europe's corporate debt landscape is a complex and multifaceted issue, with a surprising twist that challenges conventional wisdom. While governments often take center stage in discussions about debt, the focus on companies reveals a different story. The countries with the highest corporate debt are not the ones you might expect, and the reasons behind these figures are both intriguing and concerning.
The Top Borrowers
Luxembourg - At a staggering 251.1% of GDP, Luxembourg takes the top spot. However, this figure is easily misunderstood. The country's central bank explains that it largely reflects Luxembourg's role as a leading international corporate finance hub. Thousands of foreign-owned holding and financing companies are based here, and their debt is matched by financial assets. This is not excessive borrowing by domestic businesses but rather a reflection of the country's global financial influence.
Denmark - Denmark comes in second with 115.4% of GDP. The country's largest international companies, such as Novo Nordisk and Carlsberg, have turned to international bond markets for financing. This trend has led to a tripling of corporate bond borrowing in the past five years, with most debt held by foreign investors and issued through subsidiaries based outside Denmark.
Sweden - Sweden, at 108.6% of GDP, has a unique situation. Much of its corporate debt is concentrated in commercial property, with real estate companies borrowing heavily during low-interest rate periods. This sector became a financial vulnerability when interest rates rose sharply after 2022.
Cyprus - Cyprus, with 107.3% of GDP, follows a similar pattern to Denmark and Sweden. The European Central Bank estimates that companies with little real economic activity account for a significant portion of the country's international assets and liabilities. More than 80% of cross-border investment flows through these special-purpose entities, inflating the debt figures.
Belgium - Belgium, at 90.6% of GDP, has a unique situation due to its long-standing role as a base for multinational companies managing internal financing. The National Bank of Belgium estimates that removing internal financing operations would lower company debt to around two-thirds of GDP.
The Unexpected Leaders
Interestingly, France, with 91.6% of GDP, and Belgium, with 90.6% of GDP, are among the top borrowers. However, the reasons behind these figures are different. France's elevated corporate debt is considered a genuine macroeconomic issue, with the Banque de France identifying French companies as the most indebted among the eurozone's largest economies. Belgium's position is largely due to intra-group financing by multinational companies.
The Small Country Effect
What's striking is that four of the top five countries are relatively small economies. Luxembourg, the Netherlands, Cyprus, and Belgium are all international financial hubs, hosting thousands of holding companies and financing vehicles used by multinational corporations. These entities often have limited economic activity in the host country but are classified as non-financial corporations in official statistics, inflating the debt figures.
Beyond the Numbers
The ranking reveals more than just borrowing patterns. It highlights the strategic choices multinational corporations make in organizing their finances. The inclusion of cross-border intra-group flows in official statistics contributes to the high debt figures in international financial centers. This is why central banks in these countries publish alternative measures that remove these financing structures, showing lower levels of domestic corporate indebtedness.
The French Exception
France stands out as the only major European economy with both high public debt and genuinely elevated corporate indebtedness. The Banque de France considers corporate leverage a real macro-financial vulnerability, and the country's businesses face relatively high debt-servicing costs compared to their European peers.
Conclusion
Europe's corporate debt ranking is a complex issue with surprising twists. The top borrowers are not the ones you might expect, and the reasons behind these figures are multifaceted. The ranking highlights the strategic choices of multinational corporations and the role of international financial hubs. It also underscores the need for a nuanced understanding of debt, considering both public and private sectors, and the potential implications for economic stability.
