Thursday, February 11, 2010
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, 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).
In the chart, there is a 45-degree line: countries above the 45-degree line are expected to increase debt burden spanning the period 2009 and 2012; countries below the line are expected to lower debt burden over that same time horizon.
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.
Japan has a lot of gross debt but most of it is issued domestically. Total foreign debt - debt held by foreign investors - is expected to be just 22% of GDP in 2009. Having a lot of domestic debt is sometimes okay, as firms, pensions, and households support (define) demand for the debt. On balance, this makes aggregate debt (public plus private) much smaller.
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.