Thoughts on soveriegn debt
by Rebecca Wilder
Today the European Union released a statement about Greece. Absolutely no specifics are given regarding the terms of any Greek bailout, but there was a (slight) surprise:
Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.
This is a much broader statement than I was expecting; I take it as a blanket guarantee. Euro area members – Germany and France being the largest members as measured by aggregate GDP – will support the stability of the euro-zone, meaning that help will be dished out where needed.
I wanted to look at debt levels and talked to debt collectors about it and not just in Europe but across the world. I suspected (before I made this chart) that the emerging market space would generally reduce debt levels (consistent with broader trends in countries like Indonesia or Mexico), while developed countries would generally increase debt levels. “Debt” considerations go deeper than gross debt as a % of GDP. I digress.
Below I illustrate two charts of gross government debt as a percentage of country GDP. The first chart illustrates general government debt burden for 68 countries, emerging and developed markets alike. Global Insight forecasts the numbers, which is proprietary information, but you can see the IMF’s forecast for free here).
Global Insight envisages just three “developed” countries to drop debt burden between now (2009 forecast) and 2012: Netherlands (barely), Norway, and Denmark. Any other debt improvements will occur across the emerging market space (there are quite a few countries, by the way).
The second chart illustrates the same pattern of indebtedness, but for the “big spenders”.
Of the big spenders, Japan is the worst, with debt rising from 229% of GDP expected in 2009 to 230% of GDP by 2012 (this forecast was published before the passage of the Japanese 2010 budget, so indebtedness is likely to be higher still). But it’s only the worst. There are other countries, Lebanon, Greece, Iceland, USA, fighting for second place. Looks bad, right?
Well….maybe…sort of. Before you start freaking out, there are things that one must consider.
Autonomous monetary policy
This is an important one, and central to Greece’s current situation. If the Greek government could print money – the ECB controls the money supply across the 16-member euro-zone – it would. It would simply print euros pay debt obligations, essentially inflating its way out of debt. Japan and the US can do this, making the risk of default lower.
Of course inflating your way out of debt can cause a much bigger problem if money supply growth gets out of hand. And this method of debt reduction can lead to a much slower and probably more painful way of going bankrupt.
Rebecca Wilder
crossposted with Newsneconomics
It is now quite clear that PIGS cannot learn to fly.
EU leaders showed yesterday that when you do not have ideas you’d better have a plan, a rescue plan in this case. Some said the meeting achieved little more than a political statement, leaving details to be worked out later by EU finance ministers.
http://mgiannini.blogspot.com/2010/02/too-little-to-fail-or-when-you-do-not.html
If you check sovereign debt ratings changes over the past year or so, you’ll see that investment grade ratings have, as a group, been falling, while (soemtimes formerly) spec grade ratings have been rising as a group. To some extent, that is just the result of having bounds on ratings. AAA can’t go up, but it can go down. Still, my understanding is that the move is a fairly strong one, and not just an artifact of the structure of the ratings system.
kharris,
It’s about the composite measure of sovereign risk, rather than simply debt. Indonesia, Peru, Brazil – many are being outright upgraded (as in the case of the formerly mentioned) or put on positive outlook. These countries are seeing the benefits of improved governance and more stable policy regimes (monetary and fiscal alike). And as I show above, it’s the EM world that is generally dropping debt levels (as one measure) rather than the developed markets. There are obviously notable exceptions – Mexico, for example.
In contrast, the US, Japan, and UK already had credible policy and rule of law – but it’s the credibility of policy that is dropping the ratings (i.e., debt management).
Intereesting times indeed!
Rebecca
http://baselinescenario.com/2010/02/09/revised-baseline-scenario-february-9-2010/“>Peter Boone, Simon Johnson, and James Kwak at Baseline Scenario describe the sovereign credit crisis in Europe as well
http://baselinescenario.com/2010/02/06/is-tim-geithner-paying-attention-to-the-global-economy/
http://baselinescenario.com/2010/02/07/europe-risks-another-global-depression/
What the administrations’s and congress’ economic advisor ought to tell them, “Stop spending the money, assholes!”
Rebecca,
Appreciate your posts on this issue. I am surprised that more readers are not commenting or paying attention, as the case may be.
EuroMess…double dip global recession in the making?
The EU has already allowed the problem to exist too long. There is serious risk that economic damage will extend well beyond the 27 EU countries if the problem is not contained and corrected immediately.
Weaker Eastern European is depending on Western Europe for economic recovery and growth. The economies of the Western Europe are dragging along with minimal growth. China, half way around the globe, is in the middle of a round of extreme tightening evidenced not only by bank loan recalls but the sale of certain commodities originally imported or shipped from abroad then diverted in route. China also depends on EU growth as do parts of South America. Meanwhile, renewed strength in the U.S. Dollar will slow the sale of U.S. exports.
A failure to solve the EuroMess immediately may very set the stage for speculators’ attacks on other economic outputs (weak nations) around the globe. Iceland has already defaulted on bank loans. Greece is but another domino in the sovereign chain that may topple rapidly if decisions aren’t implemented quickly. If the problem spreads and Italy flounders (moreso than in the recent past), there may be no immediate end to the chain of events that unfold.
It may be the case that the EuroMess and China will be at the forefront of a double dip global recession. It is interesting that this wasn’t understood early on and is still missing from most econ analyses and major news media commentary. Naturally, the global public will be treated to another round of “we didn’t see it coming” excuses if this scenario unfolds.
The EU has failed to clean up the problem quickly. Major error in the making…
I read ur comments carefully. u r correct to the extent that EURO-MESS is going to continue for some tie. I disagree in ur doubts about China.No doubt the economic linkages of \china and EU have grown over the period of time and the adverse impact of bad economic conditions f EU are going to impact China but not tom the extent of converting the large economy from a prospering one to a recession. It is evident from the 2009 results that the economic management by china is better than the other parts of the world and that they have the capacity to weather the economic storms.
How are you calculating souvereign debts?
Are you counting intergovernment holdings like the social securrity trust fund? I guess so.
Are you counting MuniBonds? In the EU case you obviously do.
Overall it is not so easy to compare the debt levels of different countries. But if you don’t think that the social security trust fund will grow indefinitly at least with the pace of the interest income of its stock, I think these graphs clearly show the US in an overly rosy light compared with the EU countries.
The Muni Bonds make about 20% of GDP in the US, perhaps more due to the current recession. The fact, that in Europe municipalities are usually not defaulting but the debt taken on by the next higher level, while in the US municipalities do default, actually makes the debt burden in the US worse, because of the higher risk premium payed by US municipalities.