Fiscal Death Watchlist

I found Nick Rowe’s post Is Japan Already Dead quite inspiring so I decided to dig up the most current IMF World Economic Outlook Database for numbers on net debt to GDP ratios.  Japan – which may already be dead – has a net debt to GDP ratio in 2012 of 134 percent.  An estimate of the net debt to GDP ratio does not exist for all countries but for those for which data is available, I offer the following fun ranking: the fiscal dead, the fiscal zombie (walking dead) and the fiscal living.

Of course this ranking is completely arbitrary on my part.  However, if your net debt to GDP ratio is over 100 percent, it means that it would take an entire year or more of your national output to pay off the debt.  I will assume that is equivalent to fiscal death.  As Figure 1 shows, the IMF numbers would put seven countries on the fiscal dead list with Greece at the top (a net debt to GDP ratio of 156%) and Ireland at the bottom (with a net debt to GDP ratio of just over 100%).

 

If a country’s net debt to GDP ratio is between 50 and 100 percent, I have placed them in the next category.  They are not quite fiscally dead as they can move around but their room to manouver is limited - they are the walking dead – a fiscal zombie.  Especially for the ones approaching a debt to GDP ratio of 100 percent, they are in pretty tough shape given that they would have to devote much more than half their national output to pay off their debt.  Figure 2 shows they range from Cape Verde (with a net debt to GDP ratio of 97%) to Mauritius (with a net debt to GDP ratio of just over 50%).  Note that my list of fiscal zombies includes the USA, France, the UK and even Germany.  However, being a fiscal zombie is a bit of a continuum with Germany (net debt to GDP ratio under 60%)  far less of a zombie than say France, Belgium or the United States (debt to GDP ratios over 80%).

 

 

Finally, I term the fiscal living as those countries with net debt to GDP ratios below 50 percent – so less than half of their national output in a given year is required to pay off the debt.  The tail end includes a sub-group I will term the fiscally anointed – countries with negative net debt to GDP ratios according to the IMF numbers.  Resource wealth is an obvious reason for being fiscally anointed – for example Norway or Saudi Arabia.  Some of the others I’m not so sure  – does Sweden have oil wealth too?  I’m certain someone will fill me in.  In any event, Vietnam is at the top of this list with a net debt to GDP ratio of 49 percent while Belarus and Sierra Leone come out at 0 and the remaining are the fiscally anointed. 

 

 

Interestingly enough, there may be biblical overtones in these numbers.  There are seven fiscal zombies (seven deadly debt sinners?) and there are twelve fiscally anointed countries (apostles of fiscal rectitude?) The Canadian Federal Ministry of Finance will be reassured to know that Canada is among the fiscal living and the Federal government will take it as yet more evidence that Canada’s Economic Action Plan is working but I digress.  However, the fiscal living is the largest of the three groups suggesting that there is hope yet for a troubled world. Whether by good policy or outrageous fortune, a rather large number of countries have managed to keep their net debt to GDP ratios below 50 percent. 

Of course, it will be pointed out that a net debt to GDP ratios over 100 percent  (or as high as 156 or 134 percent) is not really fiscal death given that historically, some countries have had much higher ratios and still managed to get by.  For example, think of Britain at the end of the Napoleonic Wars or Canada at the end of World War Two.  Yet, what comes to mind is the following.  Both of those examples are the end result of a period of major warfare – one to defeat Napoleon and the other to defeat Hitler.  What exactly does Greece have to show for its debt to GDP ratio of 156 percent?

Related articles

Is Japan already dead?

Debt and Growth

Comments

[Stadius]

Why the superstitious fear of the dreaded 100% mark? People seem comfortable in taking out mortgages and other loans that are many times their yearly income, after all; non-one's proposing to pay off these debts in a single year. In case you didn't get the memo, that Reinhart-Rogoff result was a miscalculation.

Unfortunately, the more people believe in nonsense-talk about 'the fiscal dead' and the like, the greater the risk of it becoming a self-fulfilling prophecy.

[Stephen Gordon]

I always wonder how we should treat provincial/subnational debt in these comparisons. International sources like the IMF and the OECD use the federal government's debt for Canada, but provincial debt is something like another 25%-30% of GDP. I'm pretty sure there's no explicit federal guarantee for provincial debt, but there must be some holders of provincial bonds who have a reasonable expectation that if a province ever got into trouble, the feds and/or the Bank of Canada would intervene.

[Frank Restly]

"Why the superstitious fear of the dreaded 100% mark?"

Tax revenue must exceed interest expense

Tax Revenue = Tax Rate * GDP
Interest Expense = Interest Rate * Debt

If Debt / GDP = 100%, Tax Rate / Interest Rate must be greater than 100%
If Debt / GDP = 200%, Tax Rate / Interest Rate must be greater than 200%

[J.V. Dubois]

What I find striking on these graphs is that it seems that almost all countries are "indebted". Which does not make sense as it takes two to tango and where there are debtors there are also creditors. So assume that it is net debt only for governemnts.

Moreover, sometimes when there are debts there are also assets. Homeless person may have lower debt than somebody who still has half of his mortgage to pay off - but it would be meaningless to use debt to point that the former is in a good financial shape while the latter a rotten fiscal corpse already. So yeah, maybe Japanese have to work for one year to pay down their debts. But maybe they used the debt to purchase foreign assets that they can liquidate if push comes to shove.

PS: plus then there is plenty of things to worry about if you are Japanese besides government debt. For instance Tokyo produces over one third of Japanese GDP. So imagine what effect a catastrophic earthquake in Tokyo could have on Japanese economy - and this event is almost certain in long-term. Even disruption of daily operations of this Megacity could have broad macroeconomic consequences - and we are not even counting damage on long-term infrastructure (asset side).

[genauer]

why dont you look at household debt?

It is an excellent predictor of coming financial crises, see

Warren Brussee "The Second Great Depression, 2007 - 2020"

And Canada looks very much like the next basket case:

http://ftalphaville.ft.com/2013/06/06/1527992/canadas-grizzly-outlook/

[BPS]

Hi Livio,

Nice post. I'm a bit surprised that you used the net debt numbers rather than gross debt. Is net debt as great a comparator as using gross debt? I assume you got these numbers from the IMF, but even they caution that different countries add up their assets differently, (as I'm sure they do their liabilities). Aside from that, the gross debt is the stuff that actually needs to be rolled over and that need to have interest serviced, i.e., it's more important in terms of cash flows, so in the context of Nick's previous post (i.e. can Japan actually service their debt) from a future revenue and liability standpoint the gross debt is the number they have to contend with. . .so I'm a bit surprised that you show comparisons in net debt.

In the Canadian context, I agree our Federal net debt to GDP is low, but this is really misleading for a federation such as Canada, as compared to say, France or the UK, where there are no equivalent to our provinces. The net public debt to GDP (i.e. including the provinces and all other public debt) is somewhere around 85% in Canada, which puts us much closer to France, the UK, the US, etc, and that probably be mentioned.

For my debt to GDP ratios, I look at the economist intelligence unit
http://www.economist.com/content/global_debt_clock
Japan's Debt to GDP: 241.5%
Canada's Debt to GDP: 85.9&

In the CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html?countryName=Japan&countryCode=ja&regionCode=eas&rank=1#ja)

Japan: 214.30%
Canada: 84.10%

[Livio Di Matteo]

BPS: That is a good point about the gross debt BPS as well as the point about including the provinces - that also addresses Steve Gordon's point earlier. I thought about using gross debt but figured if I used it could be argued that assets had to be taken into account and using gross debt was "overestimating" the debt problem relative to GDP.
Steve: I think you are right about there being no explicit federal guarantee for provincial debt. Expectations of assistance are based on the precedent of federal loan assistance that was provided to a number of provinces in the 1930s.

[Chris J]

Sierra Leone is clearly the place to be;-) I have high debt because the bank owns my house and I am paying them back. I would be much worse off living in a tent in a public park.

While it is true we should concede that if interest rates go up there could serious pain, there is serious pain now from massive underemployment and low aggregate demand. The thing to look at is how countries are trending, and there it is quite clear. The UK worried about the fiscal situation, did austerity, and made the fiscal situation worse. The US is spending ridiculous amounts of money and kept taxes low and their deficit is shrinking.

There is something perverse going on in the world right no; zero lower bound and all that. What I see in your chart is that there is almost no correlation between fiscal situation and economic health, except for a few extreme cases, most of which do not control their own currency.

[Joe Smith]

Even if the Federal government has not guaranteed, for example, Ontario's provincial debt, paying that debt is a burden on the economy of Ontario and the taxes to service the debt must be extracted from the Ontario economy.

Italy has large gold reserves and could reduce its debt by monetizing those reserves.

[Mark]

Japan has the biggest difference between gross (~230%) and net (~130%)debt of any country in the world at 100pp of GDP.

This means that the government has taken on balance sheet (some of) its future pension payments risk via the social security trust fund which holds a massive quantity of Japanese government bonds. In many other countries this liability is simply a contingent one. The economic interpretation of the two positions is similar whether the liability is on or off balance sheet.

[Ben]

I assume that your point is that a higher debt ratio = greater risk to the country in question (hence they're 'dead'). Well, I think you're missing an important detail here. Much of Japan's debt is owned by its own citizens. So while the debt rate may be high, the interest payments circulate within the country. In contrast, many countries have primarily foreign-owned debt, which means not only is a significant portion of the country's wealth being sent abroad, but it also arguably puts them in a much more vulnerable position if there was to be a crisis of confidence. So I suggest there's a lot more to these charts than simply a %.