Debt sustainability: Which countries have the biggest problems?

Great article from the Economist

The Economist tries to answer the question, which country is in the most trouble?

The ability of a government to honour its debt depends on a number of factors, in particular the size of the debt burden relative to GDP, the interest rate paid on that debt relative to the economy’s growth rate and the size of the government’s primary budget balance—the surplus, or deficit, before interest costs.

If the interest rate paid on public debt is higher than the economy’s growth rate, the stock of government debt will rise as a share of GDP unless governments run a primary budget surplus. The bigger the stock of debt, the bigger that surplus needs to be. This arithmetic suggests that countries with big primary deficits, big debt stocks and a big gap between interest rates and growth are most vulnerable.

Some interesting things to look at here.  The maturity of the debt can give an indication of how soon trouble can erupt.  Those with shorter maturities have a more pressing need to roll their funding needs.  What makes this situation so tenuous is that perception can become reality.  As the markets push yields up on fear of defaults, governments will have a harder time servicing their debt.  This can lead to a nasty downard spiral. 

The Primary budget balance (column 1), shows each country’s budget deficit or surplus.  Net debt is the OECD’s projected net debt-to-GDP ratio for 2010.  Interesting enough, the US is actually in the middle of the pack.  Not suprisingly, Japan, Italy, and Greece are all near or over 100% net debt – to – GDP. 

The third column, in my opinion, is the most interesting of the bunch.  The third column measures the gap between bond yields on debt of average maturity for each country and the OECD’s forecasts for growth in 2010 and 2011. A larger negative number implies a larger issue.  It shouldn’t be a suprise then to see the PIIGS deeply in negatives, as their bond yields have spiked in recent weeks.  What is suprising is that the US actually have a positive number, which reflects a still health demand for US debt.

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1 Response to “Debt sustainability: Which countries have the biggest problems?”



  1. 1 ETF FOOL Trackback on March 6, 2010 at 9:01 pm

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