The
countries with the highest debt-to-GDP ratios are Japan (230%), Greece (177%),
Lebanon (134%), Jamaica (133%), Italy (132%), and Portugal (130%). This isn’t
necessarily a huge problem. As long as countries are using borrowed funds to
successfully stimulate their economies, they will be able to pay back their
debts on time.
This debt is not necessarily a bad thing -
in fact it’s quite normal for a country to raise debt - but excessive debt
could put a country’s future economic wellbeing at risk if the underlying
reasons that the debt was required in the first place are not addressed.
One of the ways to compare debt levels
between countries is the debt-to-GDP ratio: a ratio of a country’s total debt
to its gross domestic product (GDP), where debt is measured in dollars ($) and
GDP is measured in the value of goods and services produced per annum ($/year).
Therefore, the higher the ratio, the longer it will take for a country to pay
off its debt. For instance, a country with debt-to-GDP ratio of 100% could
theoretically pay off its debt in one year; but realistically, a country will only
devote 5-10% of its GDP to debt repayment, so it would take about 10 years to
pay down the debt in this instance.
We built a map to compare the debt-to-GDP
ratios of the world’s most representative economies. The size of each country
on the map represents the level of debt - a larger size means a higher
debt-to-GDP ratio. We also included a color coding to illustrate the GDP growth
rates of each country: red countries have negative growth rates (-5% to 0%),
and green countries have very high growth rates of more than 5%.
The countries with the highest debt-to-GDP
ratios are Japan (230%), Greece (177%), Lebanon (134%), Jamaica (133%), Italy
(132%), and Portugal (130%). These countries, with perhaps the exception of
Lebanon, also have low (or negative) GDP growth rates, which is not good news
for their economic outlooks. Obviously, Greece is already dealing with
financial turmoil due to its inability to pay off its debt, but other countries
with high debt levels and low economic growth rates also face serious default
risks (e.g. Italy and Cyprus).
For the countries with the highest
debt-to-GDP ratios, debt has actually been increasing over the past several
years. But this isn’t necessarily a huge problem. As long as countries are
using borrowed funds to successfully stimulate their economies, they will be
able to pay back their debts on time. But if governments continue to borrow
without increasing economic output (GDP), debt levels could get out of control
and countries will be forced to default on their loans (this is what happened
to Greece).
Interestingly, the countries with the lowest
debt-to-GDP ratios (Saudi Arabia, Nigeria, UAE, and Russia) all have large
nationalized natural resource (oil and natural gas) industries. The production
of oil and gas provides these countries with a relatively stable source of
revenue, which means that they don’t need to borrow funds to pay for government
services.
It should be noted that, according to the
IMF, there is no simple threshold for unsafe debt-to-GDP ratios. But the IMF
has found that higher debt levels are associated with more volatile growth.
Countries with high debt levels are more susceptible to collapse when economic
shocks occur. The important thing is therefore not so much the level of debt, but
whether the underlying causes of the high debt level are being addressed.
How does the US fare?
The US has
fallen from the 6th most indebted nation (in terms of debt-to-GDP) in 2014 to
12th in 2015. This isn’t necessarily great news for the US, because its
debt-to-GDP ratio has actually increased to 103% from 101.5% in 2014. The US
fell down the rankings not because it paid off its debts, but because other
countries have taken on more debt.
US debt, now at about $18.4 trillion,
continues to rise. Government deficits were rare before 1975. Until then, the
debt-to-GDP ratio hovered around zero, with some minor deficits occurring here
and there. But after 1975, US government deficits really became the norm.
Amazingly, the government deficit now is far higher than it was during WWI
(debt-to-GDP of 17%), WWII (27%), and the Korean War (1.7%). The last time the
government ran a surplus was between 1998 and 2001.
Despite the fact that the US has a fairly
healthy GDP growth rate of 2.4%, there is no end in sight to the growth of the
government deficit. As long as government spending continues to rise, the
country will take on more and more public debt.
Many countries, including the US, are
dealing with unsustainable debt levels. In order to reign in this debt, either
government revenue generation models will need to change, spending cuts will
need to be made, or economic growth will have to increase.
How do countries successfully pay back their
debt?
Typically
to pay off debt, a country needs to decrease spending or increase government
revenues. In the short term, decreasing spending is far more plausible. Take
Iceland for example. The country faced a debt crisis in 2008 after the subprime
mortgage crisis in the US. Iceland’s national banks were unable to get
financing from the international market, and eventually had to declare
bankruptcy. What was their solution? The government restructured the country’s
three largest banks, declaring them insolvent, and set up currency swap
agreements with nearby Scandinavian countries.
Some have argued that one of the main
reasons why Iceland was able to get itself out of debt is the country’s
Protestant heritage: the theory is that Protestant countries tend to be more
receptive to financial discipline and austerity measures in times of financial
strife.
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