Poland the second Greece or Venezuela? Will public debt lead to the collapse of the USA? Eurozone Will it fall apart because of Italy’s debt? These and other sensational questions have appeared and will appear in public space. There are few issues in the global economic debate as polarizing as public debt.
According to extreme opinion public debt you don’t have to worry, and financing state spending with deficits is natural and beneficial. The other extreme warns that the world is on the precipice, almost all countries will go bankrupt at any moment, and a financial system based on debt is a road to nowhere. Between these extremes there is a wide range of moderate attitudes. Their average can be boiled down to the statement that public debt is an inherent element of the modern economy, it can contribute to an increase in the pace of development, and incompetent and excessive use of it can lead the country to serious problems.
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The dispute over public debt will not soon be resolved to everyone’s satisfaction, so it is worth focusing on the available facts. A good starting point is the list of the most indebted countries in the world, which includes several extremely different examples. As it turns out, public debt is not equal to public debt, not only when it comes to its amount.
The indebted Big Five
Determining the list of the most indebted countries in the world is not, contrary to appearances, a trivial task. First, there are different definitions of public debt, and not all countries report in the same way. Secondly, data from less developed countries are sometimes available with a delay. Thirdly, there are problems with the reliability of data from some countries, which even international institutions admit it.
In such a situation, it will be safe to use the data available in Global Debt Database run by International Monetary Fund. For international comparisons, we will use the concept of general government debt and the latest data for 2022. It should be honestly added that not all countries report in this way (e.g. some African countries will not be among the leaders). ), however, such an approach to the debt issue will give us a very interesting top five, using the example of which it will be easier to illustrate the importance of public debt in the modern world.
1. Japan – 261 percent GDP
Japan tops the list of the most indebted countries in the world. However, the debt of the Land of the Rising Sun is not only high, but also largely internal. The largest creditor of the government in Tokyo is the Bank of Japan, which already holds over half of the issued government bonds. This is due to the way monetary policy is conducted, which involves purchasing bonds in order to keep their yields at an appropriately low level, ensuring low interest rates for the economy. Other local entities also have a significant share in Japan’s public debt, and this debt is usually long-term, which makes it easier to manage.
Japan is therefore the opposite of developing countries, which are often in external debt, for a short period of time and in foreign currency. Despite numerous internal problems, including an aging population, Japan is still one of the largest economies in the world, and the yen is one of the main currencies on global markets. This does not mean that Japanese public debt does not pose threats, especially since we have never faced a similar situation in the modern history of the financial world. Hence, Japan’s credit rating (A+/A1) is clearly lower than that of the best-rated countries in the world and only slightly higher than Poland’s (A-/A2).
2. Greece – 177 percent GDP
The country – a symbol of the debt crisis – has reduced the size of its debt, although it is still monstrous. At the peak in 2020, Greece exceeded 200% of GDP, the current level is comparable to 2011. Greece’s struggles with debt have entered the second decade and it is difficult to say today whether and when they will end. The light at the end of the tunnel was recently shown by the S&P rating agency, which for the first time since 2010 raised Greece’s credit rating from “junk” to investment grade. The agency’s analysts see hope in economic growth – in 2023 it is to be 2.3% and next year 3%, which will give a result clearly higher than the average for the euro zone.
When analyzing the Greek debt tragedy, it is important to remember the unique situation this country is in. Due to its membership in the euro zone, Greece does not have full control over its own currency, so – colloquially speaking – it cannot escape from debt in its own currency through inflation. This strategy would still have numerous drawbacks (including the destructive impact of inflation on the economy), although politically it would probably be easier to implement than the sharp belt tightening that the Greeks had to face in the previous decade. If today’s forecasts come true, Greece will return to its pre-crisis debt level only at the end of the 2020s. This will mean that an entire generation of Greeks will grow up in an atmosphere of paying for the economic mistakes of the past.
3. Venezuela – 158 percent GDP
Venezuela is most often talked about and written about in the context of hyperinflation, but the debt is also a symbol of the disastrous economic policy of the country’s authorities. Many people find it hard to believe that years ago Venezuela was one of the richest countries in the world (just like Argentina, which is now in trouble). It is equally hard to believe what is happening in this country today, especially when you look at it not through the prism of statistics, but through human stories (in this context, I can recommend the book “Gold Rush” by the Slovak reporter Tomáš Forró).
Let’s get back to the Venezuelan debt. Its scale is lower than at the peak of the pandemic, when the IMF recorded even more than 300% of GDP. The latest reports are much more optimistic. First of all, the Venezuelan Committee of Creditors is favorable about debt restructuring, provided that there is a dialogue between the authorities and the opposition in the country. Secondly, the easing of American sanctions on the government in Caracas and the oil producer PDVSA significantly increased the prices of Venezuelan bonds, due to increased hopes that the liabilities will be repaid. In this context, the American media reported widely about the Altana Wealth fund, which in 2020 invested USD 75 million in Venezuelan bonds worth a nominal value of USD 500 million. However, whether this investment will be a success and whether the Venezuelan economy will recover will largely depend on politics and relations between Caracas and Washington and the course of elections presidential elections scheduled for the second half of 2024.
4. Italy – 144 percent GDP
While the euro zone managed to cope with the debt crisis in Greece or Cyprus – although not without problems – the scenario of the crisis in Italy has always been considered a much more serious challenge. This is due to the sheer size of the Italian economy, the third largest in the EU and corresponding to approximately half of the German economy, 2/3 of the French economy and as much as ten times the size of the Greek economy. Therefore, the level of Italian debt and the difference in interest rates on bonds issued by Rome and Berlin are basic parameters for the health of the entire euro zone.
The latest news is not the best. This year, Italy plans to issue more debt than originally planned (EUR 333 billion compared to the planned EUR 310-320 billion), which is related to the deteriorating state of public finances. In this respect, Italy is moving in the opposite direction, as other eurozone countries have reduced borrowing needs, which are more costly to service in an environment of higher interest rates. Rome is also not helped by the reduction in bond purchases by the European Central Bank and delays in the transfer of money from the National Reconstruction Plan. All this in conditions of average GDP growth, at which it will be difficult to “grow out” of the current debt. Just like 10 years ago, everything indicates that without deep structural reforms, Italy will continue to be a constant candidate for the title of “sick man of Europe”.
5. USA – 121 percent GDP
U.S. public debt tells a story very different from any other debt in the world. This is due to America’s status as (still) the world’s only superpower, which also results in the dollar’s position as the main global reserve currency. Due to the size of the economy, the US public debt is nominally by far the largest in the world (over $33 trillion). What is also impressive is the fact that Washington spends on average over a trillion dollars a year on interest payments alone.
The American public debt is also distinguished by the legal structure regulating its growth. Every few or a dozen or so months, the specter of a “government shutdown” returns like a boomerang, associated with reaching further debt limits expressed in nominal terms. The last dispute of this type in Congress resulted in the Fitch agency lowering the US rating from AAA to AA+, which, however (unlike a similar move by S&P in 2011), did not trigger any negative reaction from global markets.
In this respect, the situation USA is an even bigger experiment than Japan’s borrowing, because America’s debt servicing problems would immediately spread around the world and also hit holders of American bonds, which are the most important safe haven in global finance. Ultimately, however, even the US cannot afford to ignore the threats resulting from debt – history already knows superpowers that were defeated by the laws of economics. “The dollar is our currency, but your problem” – with these words Treasury Secretary John Connelly addressed partners during the G10 talks in 1971, when the modern shape of the financial system was being forged. This maxim is still valid today and even if the financial system undergoes another transformation, as long as the US is a great power, the dollar will play an important role.
Michał Żuławiński, Association of Individual Investors
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