Debt: Get Out of Europe, Japan, and the US

Introduction

National governments are running up large deficits as they attempt to use Keynesian-inspired stimulus packages to get their economies going again. These packages, along with the excessive spending leading up to the Western banking collapse and global recession, has re-written global debt map.

There are several types of debt worth examining. A country’s total debt includes the debt of households, firms, and governments, and for certain purposes, it is useful to consider each of these separately. There should be less concern if a country’s debt is self-contained – the government selling most of its debt to its own citizens and firms with households and governments borrowing from one another. External debt can be far more burdensome and problematic. We are now hearing a lot about government debt and projected deficits. Below, we look at each of these debts for regions and major countries.

Government Debt

In Table 1, information on government debt is presented. As can be seen in the middle numerical column, Asia has the lowest government debt as a percent of GDP ratio followed closely by Latin America. With a debt ratio of .728, the government debt ratio of the Europe, US, and Japan region is twice as large as Asia, and almost 1.8 times greater than Latin America. The final column in Table 1 indicates what the interest payments on these debts would be if the borrowing rate were 5%. At 5% interest, Greece, Italy and Japan are paying out more than 5% of GDP in interest on the public debt.

Table 1. – Government Debt to GDP Ratios, Selected Countries, 2009

Govt. Debt

Govt. Debt

Int. @5%

Region/Country

(mil. US$)

to GDP Ratio

as % GDP

Asia

$5,746,317

0.331

1.66%

China (incl. HK)

$1,650,129

0.182

0.91%

Korea, South

$376,040

0.280

1.40%

Indonesia

$288,613

0.298

1.49%

Taiwan

$239,882

0.346

1.73%

Malaysia

$181,114

0.478

2.39%

Thailand

$264,685

0.494

2.47%

Vietnam

$133,888

0.523

2.62%

India

$2,132,348

0.601

3.01%

Philippines

$203,846

0.623

3.12%

Singapore

$275,772

1.176

5.88%

Latin America

$2,190,280

0.413

2.06%

Chile

$21,987

0.090

0.45%

Venezuela

$68,909

0.194

0.97%

Peru

$66,137

0.261

1.31%

Mexico

$627,498

0.426

2.13%

Colombia

$184,538

0.461

2.31%

Brazil

$947,232

0.468

2.34%

Argentina

$273,978

0.491

2.46%

Europe, US, Japan

$22,031,484

0.728

3.64%

Denmark

$75,857

0.381

1.91%

United States

$5,657,250

0.397

1.99%

Sweden

$143,942

0.432

2.16%

Switzerland

$137,504

0.435

2.18%

Finland

$85,325

0.466

2.33%

Spain

$813,365

0.595

2.98%

Norway

$166,453

0.602

3.01%

Netherlands

$406,383

0.623

3.12%

Ireland

$112,940

0.637

3.19%

Austria

$220,354

0.682

3.41%

United Kingdom

$1,483,025

0.685

3.43%

Portugal

$174,614

0.752

3.76%

Germany

$2,170,864

0.772

3.86%

France

$1,684,061

0.797

3.99%

Belgium

$377,586

0.990

4.95%

Greece

$366,675

1.081

5.41%

Italy

$425

1.152

5.76%

Japan

$7,954,861

1.921

9.61%

Source: CIA Factbook

In Japan, local citizens own more than 90% of the government debt and interest rates are lower than 5%, so this debt burden is not as significant as it is for other countries.

Government Deficits

Table 2 presents actual and estimated government deficits for advanced and emerging nations.

Table 2 – Government Deficits

Year

Advanced

Emerging/developing

World

2000

0.01

-2.63

-0.96

2001

-1.38

-3.35

-2.12

2002

-3.20

-3.86

-3.45

2003

-3.78

-2.99

-3.47

2004

-3.23

-1.28

-2.45

2005

-2.39

-0.14

-1.47

2006

-1.44

0.46

-0.64

2007

-1.31

0.47

-0.54

2008

-3.44

-0.04

-1.93

2009

-6.94

-3.21

-5.23

2010

-6.50

-2.41

-4.58

Source: IMF

Note the growing disparity between emerging and advanced country deficits. The situation in Europe is particularly sticky. Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain use the Euro. And according to the Euro agreements, government deficits should be limited to 3% of GDP. As Table 3 shows, Greece, Ireland, Malta, and Portugal have deficits in excess of 3% (the UK is not a member but also has a high deficit). Pressure is being applied to Greece, Ireland, Malta and Portugal to reduce their deficits just at the time that stimulatory policies are needed to reduce unemployment. Spain, with an unemployment rate of 19.5%, is right at the limit.

Table 3. – European Deficits as % GDP

Region/Country

2007

2008

Euro area (16 countries)

-1.1

-2.0

Greece

-5.1

-8.3

Ireland

0.2

-6.8

United Kingdom

-2.7

-4.8

Malta

-2.2

-4.7

Portugal

-3.2

-3.3

France

-2.3

-2.9

Spain

1.1

-2.8

Italy

-2.3

-2.7

Slovakia

-1.8

-2.7

Belgium

-1.1

-1.6

Croatia

-2.5

-1.4

Slovenia

-0.1

-1.2

Austria

-0.7

-0.6

Germany

-0.8

-0.6

Luxembourg

0.9

-0.2

Netherlands

0.5

0.5

Finland

2.1

0.9

Denmark

4.7

3.8

Norway

18.2

19.9

Source: Eurostat

External Debt

Consider next external debt – the total public and private debt owed to nonresidents repayable in foreign currency, or goods, or services. Table 4 provides these data.

Table 4. – External Debt to Export Ratios, Selected Countries, 2009

External Debt

External Debt

Int. @5%

Region/Country

(mil. US$)

to Export Ratio

as % Exports

Asia

$1,994,580

0.670

3.35%

Singapore

$19,200

0.078

0.39%

Malaysia

$48,260

0.309

1.54%

Taiwan

$82,680

0.417

2.08%

Thailand

$60,650

0.444

2.22%

Vietnam

$26,060

0.461

2.30%

China (incl. HK)

$978,200

0.643

3.22%

Korea, South

$333,600

0.939

4.70%

Indonesia

$150,700

1.304

6.52%

India

$232,500

1.500

7.50%

Philippines

$62,730

1.734

8.67%

Latin America

$683,380

1.145

5.73%

Mexico

$177,000

0.792

3.96%

Venezuela

$43,410

0.835

4.17%

Chile

$60,900

1.247

6.23%

Peru

$30,040

1.302

6.51%

Brazil

$216,100

1.360

6.80%

Colombia

$47,330

1.510

7.55%

Argentina

$108,600

1.845

9.22%

Europe, US, Japan

$51,407,563

9.050

45.25%

Japan

$2,132,000

4.129

20.65%

Belgium

$1,271,796

4.295

21.48%

Germany

$5,208,000

4.388

21.94%

Norway

$548,100

4.493

22.46%

Sweden

$669,100

5.038

25.19%

Austria

$832,400

6.085

30.42%

Netherlands

$2,452,000

6.167

30.84%

Finland

$364,900

6.304

31.52%

Denmark

$607,400

6.835

34.17%

Italy

$2,567,067

6.957

34.78%

Switzerland

$1,339,000

7.044

35.22%

France

$5,021,000

10.992

54.96%

Spain

$2,410,000

11.173

55.86%

Portugal

$507,000

12.238

61.19%

United States

$13,450,000

13.522

67.61%

Ireland

$2,387,000

22.246

111.23%

United Kingdom

$9,088,000

25.870

129.35%

Greece

$552,800

29.657

148.28%

Source: CIA Factbook

External debt is somewhat more problematic than government debt in that it must be repaid in a convertible currency. For most countries, exports are their only source of convertible countries, so we examine external debt as a percent of exports. Again Asia and Latin America are in far better shape than the developed countries. The final column on the right indicates what percent of exports would be required to service the debt if the interest rate on it was 5%. It is shocking to think that at 5%, the interest paid by Ireland, the UK, and Greece would exceed their total export revenues.

The US has an interesting debt situation. China, Japan, and more recently, Brazil, have been buying US debt as a way to keep the dollar strong. Table 5 provides data on countries holding more that $10 billion in US government debt.

Table 5. – Countries Holding More Than $100 Billion of US Government Debt

Debt

Country

(in bil. US$)

China (incl. HK)

908

Japan

769

UK

303

Brazil

161

Russia

119

Source: US Treasury

Overall, the US Treasury has borrowed $3.6 trillion from foreigners. At 5%, this debt is costing the US government $181 billion in interest annually. Of significance inasmuch as this must be added to the US trade deficit of $650 billion annually as net new dollars being supplied to the global markets.

The McKinsey Global Institute recently completed a study in which they estimated total debt by country. This includes the debt of households, business (with the financial sector broken out), and governments. Their findings on total debt for the countries they cover are presented in Table 6.

Table 6 – Total Debt, Selected Countries, 2008

Total Debt

Region/Country

% GDP

Latin America

142

Brazil

142

Asia

206

India

129

China (incl. HK)

159

Korea, South

331

Europe, US, Japan

333

Canada

245

Germany

274

United States

290

Italy

298

France

308

Switzerland

313

Spain

342

Japan

459

United Kingdom

469

Source: McKinsey Global Institute, Debt and Deleveraging: The Global Credit Bubble and Its Consequences

Again, we see a similar pattern: debt burdens are much higher in the developed nations than they are in either Latin America or Asia.

It is important to remember that the debt situation of the developed nations will worsen for the next few years as their governments apply stimulus packages to get them out of the global recession. As I have indicated in earlier postings, the global recession was far less severe in Asia and Latin America than in the West so the governments in these latter regions have not had to such large deficits.

Further Breakdowns

The McKinsey goes further in breaking down what were the sources of the major debt buildup in recent years. They find that in the Spain, the UK and the US, households, commercial real estate, and financial institutions were the primary sources of the debt buildup.

Does Debt Really Matter?

Do such debt burdens really matter? After all, as long as there is someone to buy new debt…. But, after the debt bubble burst, people lost their jobs and homes, how likely is it that people will ramp up debt and spending again? Many writers are doubtful. For example, John Mauldin has been writing for some time about the new normal.

The McKinsey study went further. It reviewed case studies of earlier collapses as a guide to what might happen next. Their overall finding:

…aggregate measures of leverage, such as the ratio of total debt to GDP, are in and of themselves not a reliable guide to the sustainability of debt or the likely speed or extent of deleveraging….To assess the likelihood of deleveraging going forward, one needs to…look at sectors…. within sectors, one must… assess the sustainability of debt, including the rate of growth of leverage, debt servicing capacity, and the borrowers’ vulnerability to income interruptions or sharp increases in interest rates.

From their review of case studies of debt collapses, they find 3 common patterns: default, belt-tightening, and growing out of debt. They expect deleveraging (belt-tightening) to take place in households, commercial real estate and financial institutions in Spain, the UK, and the US in coming years.

History shows that “belt-tightening deleveraging episodes have lasted an average of six to seven years and reduced debt to GDP ratios by about 25%.

Their advice to policymakers:

  • government policymakers must be careful not to cut back on monetary or fiscal stimulus measures too soon, lest they snuff out a nascent recovery, as occurred in 1938;
  • the right government policies are also critical to maintaining public confidence so that deflation will not occur. If households and businesses think deflation is a real possibility they will hold off on spending and investment, possibly causing deflation to take hold and economic activity to fall off, which causes debt-to-GDP ratios to soar.

My thoughts? Look for regions and countries not burdened by debt for your investments.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
This entry was posted in Global Economics, Global Finance. Bookmark the permalink.