In Part I http://pingroof.com/article/half-year-review-the-world-awash-debt-part-i we nominated “Sovereign Debt” as the key issue of the first six months (and of the full year, I’m sure). Now we take a look at some of the essential basics of this overwhelming issue – overwhelming because its impact can be felt on so many levels – from near zero interest rates paid on personal savings to an increase in taxes; from a 15% depreciation of the Euro in just one year to growing fear of a partial (or even wholesale) breakup of the European Union.
The data on world debt is so expansive that we need to focus on just a few key data points – such as the ones we visualize for you in our slide show (look to the right of this text). In those slides, I offer you graphs of the debt data from the world’s eleven largest economies (see the GDP graph). Immediately, you’ll notice that Greece, Spain, and Portugal, countries whose excessive debt we read about weekly (if not daily), are not listed here. The reason is simple. Their economic productivity does not rank among the world’s eleven largest, so the consequences of default on debt is not as great as the consequences if Italy defaults. Italy is the world’s eighth largest economy – approximately 50% bigger than Spain and almost eight times larger than Greece!
If you look at the government debt graph, the most obvious observation is how much greater debt the U.S. has than any other country. In fact, no nation at any point in history has ever accumulated as much debt as we have. The second eye-catching point is that Italy, with the eighth largest GDP, has the fourth highest debt (almost as much as Germany). Moving to the graph showing the ratio of debt to GDP (hinting at a country’s capacity to service its debt) – we notice three important facts:
1) Italy has the second highest level of debt to GDP (illustrating it is over indebted);
2) Japan has by far the highest level of debt to GDP, but the huge difference between it and Italy (and the U.S.) is that most of Japan’s debt is held by its own people – whose extraordinary levels of personal saving has become legendary. In contrast, Italy and the U.S. exhibit very high levels of dependence on foreigners to keep buying their bonds.
3) In recent years, the profligate spending of the federal government has elevated the U.S. to second place on this negative measure of national financial health.
Moving to a more direct measure of national financial stress (the amount of interest owed in 2012), we find that, once again, Italy ranks toward the top (third). Relative to its GDP, this means that more than 3.5% of Italy’s total productivity is needed each year to cover just the interest on its debt (no principle). In contrast, the financial resources of nations with comparatively healthy finances (Canada and China) are much less stressed by their 2012 interest obligation (under 0.9 % of GDP for Canada and under 0.7 % for China). You may find it interesting that the U.S. owes over 1.5% of its GDP for interest due during 2012!
Finally, take a look at the graph of the ratio of the total 2012 interest owed, plus the total amount of debt that must be “rolled” (refinanced) this year, to total GDP. This may be the best measure of financial strain from debt – and sure enough, Italy ranks second, needing to cover refinancing needs and current interest due that exceeds its GDP by fifty percent! No wonder the financial markets are skeptical! In fact, earlier this past week, the stock market took a dive because of Euro Debt fears. However, if you look closely at the graph of the Dow Jones 30 Index prices from this past week, you’ll see upward moves on Thursday and Friday that averaged about 200 points each day! During a week when earnings reports from Apple, Starbucks, and Facebook proved to be great disappointments, why would the markets rally? Only one reason – European Central Bank President, Mario Draghi, promised to do “whatever it takes” to carry Europe through this crisis.
Translated, that means that the ECB will join our Federal Reserve in printing as much money as it takes to avoid a Sovereign Debt collapse. Temporarily, the markets were pleased. But I must remind us all that (as always) “temporarily” is the key word!
In Part III, we’ll examine our own, more local version, of Greece, Spain, and Italy – the State of Illinois!