World Public Debt – Main Destabilizer of Global Economy
Valentin KATASONOV | 10.03.2015 | WORLD | BUSINESS

World Public Debt – Main Destabilizer of Global Economy

Winding up the discussions launched by the articles A Panorama of Global Debt and Global Debt: The Tip and the Bulk of the Iceberg, it’s important to focus on the conclusions offered by the authors of McKinsey consulting company’s report. They say that the world public debt has become the main factor to cause the destabilization of global financial and economic situation. It’s necessary to look for ways to slow down the debt growth, if not reduce it. The first wave of world crisis was mainly provoked by fast growth of financial sector, corporative and household debt. The second wave will probably be caused by the increase of national debts. 

The McKinsey report offers information which allows to make a list of world top ten public debt-to-GDP ratio growth leaders (% of GDP). 

1. Japan – 234

2. Greece – 183

3. Portugal – 148

4. Italy - 139

5. Belgium – 135

6. Spain – 132

7.  Ireland - 115 

8.  Singapore – 105

9.  France – 104

10.  Great Britain – 92.

Finished eleventh in the race, the United States is left out of the top ten list with 89%. It gives rise to doubt because according to US official statistics the US debt-to-GDP ratio in 2011 exceeded 100% of GDP to reach the level of 106,6% in 2013. According to preliminary estimates, the federal debt held by the public reached 109, 9% in 2014. Besides the increasing debt leaders, there are also countries with the lowest debt-to-GDP ratio. 

1. Saudi Arabia – 3

2. The Russian Federation – 9

3. Chile – 15

4. Argentina – 19

5. Peru – 19

6. Indonesia – 22

7. Australia – 31

8. China  31

9. Columbia – 32

10.  Norway – 34.

It strikes an eye that developing economies dominate the list of the countries with the lowest public debt-to-GDP ratio while the world economic champions are the leading debtors. The United States is the leader among debtor nations. Last year the estimated debt was $18 trillion. Japan is second in the race with $10, 5 trillion with China trailing behind with its debt-to-GDP ratio around $5, 5 trillion. The total ratio of the leading three is about $34 trillion or approximately 58-60% of global public debt. 

For comparison, the Russia’s public debt was around $50 billion or less than 0, 1% of global debt. It serves the purpose to remember this fact today as the three world leading rating agencies have downgraded (or threatened to do so) to «junk» level. Exhibit 1 shows the list of ten countries with the highest debt-to-GDP ratio growth since 2007 till 2014. According to it, three PIGS countries (Portugal, Italy, Greece and Spain) top the list with Japan, Italy and France running close. The US tempo of debt-to-GDP ratio growth by far exceeds that of PIGS. 

Exhibit 1.

Debt-to-GDP ratio growth in 2007-2014

Country

Debt/GDP in 2007 (%)

Debt/GDP in 2014 (%)

Increase of debt-to-GDP

ratio, 2007–2014

Percentage points

Ireland

22

115

93

Spain

40

132

92

Portugal

65

148

83

Greece

113

183

70

Japan

171

234

63

UK

42

92

50

Italy

92

139

47

Netherlands

45

83

38

France

66

104

38

USA

54

89

35

Exhibit 2 shows a list of countries that achieved fiscal adjustment in 2007-2014 to start public sector deleveraging. According to the McKinsey report, this list includes only nine out of 47 states surveyed with only one advanced North European economy – Norway while others are backward countries, except Israel. 

Exhibit 2.

Countries with reduced debt-to-GDP ratio in 2007-2014 

Country

Debt/GDP in 2007 (%)

Debt/GDP in 2007 (%)

Reduction debt-to-GDP

ratio, 2007–2014

Percentage points

Norway

50

34

-16

Saudi Arabia

18

3

-15

Argentina

33

19

-14

Peru

29

19

-10

India

71

66

-5

Indonesia

27

22

-5

Israel

71

67

-4

Turkey

39

35

-4

Philippines

43

40

-3

The authors believe that the debt-to-ration growth will remain the leading tendency in the near future in absolute and relative terms, especially when it comes to advanced economies. The debt increase could be avoided thanks to sufficiently high and stable economic growth allowing to pay off and redeem credits and loans. The problem is that many of the surveyed states have the economic growth near to zero or even negative. The authors of the report tried to assess the economic growth required to avoid refinancing old debts at the expense of new loans and credits to start public-sector deleveraging. The estimates are presented in Exhibit 3. 

Exhibit 3.

Acceleration in the tempo of economic growth to avoid the further increase of public debt 

Country

Real GDP Growth 2014 (%)

Minimal tempo of GDP growth required to stop the increase of public debt (%)

Deficit of GDP growth percentage points

(2) – (1)

 

(1)

(2)

(3)

Spain

-2,3

2,6

4,9

Japan

-5,4

-1,3

4,1

Portugal

+0,1

+3,7

3,6

France

-2,3

+0,2

2,5

Italy

+1,7

+3,6

1,9

United Kingdom

-2,7

-0,8

1,9

Finland

-1,6

-0,3

1,3

Netherlands

-1,0

0,1

1,1

Belgium

+0,1

0,8

0,7

United States

-1,0

-0,8

0,2

As Exhibit 3 shows, it is especially hard for such countries as Spain, Japan, Portugal, France, Italy and Great Britain to do without further public debt increase. According to the opinion of authors, it requires drastic changes of the economic structure. They allude to the need of taking some sort of international decisions to slow down the public debt growth and stop the vicious circle «public debt-economic growth». It’s extremely hard, or even unrealistic, to launch structural reforms against the background of constantly increasing public debt. Partial writing off or introduction of moratorium on serving and paying off public debt is indispensable. That’s what Syriza (the ruling coalition of Radical Left in Greece) leaders say. The new Greek government tries to come to agreement with Brussels on partial writing off the Greek public debt (which is almost completely an external debt) or introduction of moratorium on payments till the stagnated national economy is back on track. According to Greek government, the moratorium can be called off only after the economic growth of at least 4-5% a year is reached. To do it, the draconian austerity measures imposed by the Troika of creditors (the International Monetary Fund, the European Central Bank and the European Commission) should be cancelled. The austerity policy backlashes to bring down the consumer demand and deepen economic stagnation. 

Tags: European Union  China  Russia  US 

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