‘Europe’s sovereign debt crises are changing daily, yet are making little progress toward long-term solutions. The only questions are when, how and who will be left holding the bag?’ asks NAI chief economist Dr. Peter Linneman. In his new white paper, Dr. Linneman discusses the potential effects the debt crisis in Europe will have on the commercial real estate industry.  The following is an excerpt:

Why is it that drops in asset values associated with impaired debt undermine economic activity far more than larger drops in equity values do? For example, during the tech bubble and the subsequent crash, $5 trillion in economic value disappeared over 30 months on the U.S. stock markets. This dwarfs the decline in asset values associated with impaired debt during the financial crisis, which are perhaps $1-2 trillion. Yet the real economy quickly regained its balance even after trillions of dollars were wiped out on the stock market, while far smaller losses via impaired debt have constipated economies across the globe. No clearer example exists than Japan over the past 21 years. And now Europe is following suit.

The reason is that when equity value disappears, it is the end of the story. People feel poorer, pick themselves up, dust themselves off, and focus on recreating value by new productive economic activities. In contrast, when value is destroyed via impaired debt, debt contracts allow participants (think: Europe) to argue endlessly about who will bear the burden, rather than spending their resources moving forward.

Read the entire article here.

If you like what you read, stay tuned to the NAI DESCO website for information on Dr. Linneman’s next webinar.