Calculating international debt

Article Category: Finance  |   

Not enough of these to go round

Sovereign debt, public debt, international debt – these and similar terms have been rising ever higher up the news and political agenda since the collapse of Lehman Brothers in September 2008 suddenly exposed the bankruptcy of the global financial system. But what do these terms actually mean – and what does international debt mean for all of us who aren't in charge of the nation's finances?

This is a complex subject so we'll deal with it in two parts:

Part One: Measuring International Debt

National debt, also called public or government debt, is simply defined as the total amount of money that a national government owes to its creditors. It can be counted in millions (more usually billions) of dollars but this is relatively meaningless, since what really matters is the country's ability to service that debt – to keep up its loan repayments and to raise more money as needed.

Therefore the key measurement of a nation's debt is as a percentage of gross domestic product (GDP), which as a rough measure of a country's turnover is the most widely accepted measurement of national earning power and wealth.

Net debt versus gross debt

There are two standard ways to measure the size of a national government debt: gross or net.

Gross debt tots up all general public financial liabilities, meaning the short- and long-term debt of all institutions in the general government sector. Sometimes this also includes unfunded government 'promises' such as future pension payments or amounts owing for goods and services the government has contracted but not yet paid.

As an illustration, take a look at how the US Government totalled its debts, as of Summer 2014: a total of more than 17 trillion (17,000 billion) dollars.

In contrast, net debt calculates general government gross financial liabilities as above but then deducts all financial assets.

For some countries, particularly developed ones, there can be huge differences between gross debt and net debt.

While net debt might seem the fairer measure, the problem is that governments differ widely in what types of financial assets they include in their calculations, making actual comparisons between countries almost impossible.

Therefore, gross debt as a percentage of GDP is the most commonly used yardstick of government indebtedness, which is why it's the one used by the Organisation for Economic Co-Operation and Development (OECD).

Rise in International Debt

By this yardstick, almost all the most advanced countries in the world are doing rather badly. Since the 2008 crash, leading on to the euro zone sovereign debt crisis, most developed economies have been on a seemingly unsustainable upward trajectory of debt.

In 2007, the 34 members of the OECD 'top nations' club had government debt measuring just over 74 per cent of their combined GDPs. By 2014, this had jumped to an estimated 113 per cent. That overall figure concealed some huge disparities ranging from Japan and its gross public debt of some 230 per cent, down to little Estonia at just 16 per cent.

Japan is joined in the Top Five Most Indebted Club by the usual suspects: Greece (200%), Portugal (135%) and Italy (131%) and a new member: Ireland (128%). Not far behind are the UK and USA, both one point above the OECD average on 114% and Iceland (112%) – all significantly above the euro zone average of 103 per cent.

Superpower debt

The detailed comparisons of leading countries debt patterns are interesting – and somewhat disturbing.

To start with the global and economic 'superpowers'; USA, China, Russia and Japan, we see that American debt isn't quite as bad as sometimes portrayed.

According to the latest Economist survey, compiled from data gathered from the OECD, International Monetary Fund (IMF) and international accountants McKinsey, the USA started the new millennium with total national debt totalling around 240 percent of GDP, broken down as 70 percent company debt, 40 percent financial and 80 percent of GDP owed by domestic households. Government debt accounted for the remaining 50 points. By 2010, the first three percentages had all risen ten points or so, while government debt had nearly doubled, to almost 90 points, now accounting for one third of the total. But in the subsequent year, 2011/12, the last one for which detailed figures are available, US total debt fell back, from 288 percent to 280 percent of GDP.

In China, by contrast, national debt was around 130 percent of GDP in 2000 and had risen to only 158 percent by 2010. By far the biggest share of this debt was accounted for by company borrowings – rising from 95% of GDP in 2000 to 100% by 2010. China's financial sector debt proportion rose from 15% to 25% over the decade. Chinese households that owed a parsimonious five percent in 2000 owed 30% of GDP by 2010 while government debt had actually declined from 15% to just three per cent of GDP.

Where is China getting the money for all that building?

So China's doing fine, right? Wrong: during the following year national debt jumped to 184%, up 26 points, and the indicators are that almost all of this is accounted for by increased public borrowing.

And Russia? Their debt numbers look modest indeed, the result of being one of the most oil and resource rich nations on Earth. Russia's total national debt started the noughties at just 44 percent, reaching 71 percent in 2010 and inching up only a further point in the latest year measured. But that was 2012; before new military spending, a war in Ukraine, international trade and financial sanctions and a crash in the price of crude oil. Watch this space...

Meanwhile, the zombie economy that is Japan continued to lurch ever deeper into debt, starting the 2000s at 420% of GDP, rising to 492% by 2010 and up again by 20 points to a dizzying 512% by 2012. Of this, by far the biggest, and rising, share was accounted for by government borrowing. This started off at around a quarter of gross national debt in 2000, rising to around 40 per cent in 2010 and now accounting for well over half Japan's total debt.

Europe's debt problems

Shall we tiptoe into the euro zone and take a cautious peek under the rug? It's not going to be pretty, because the hard truth is that of the ten nations bearing the heaviest debt burden, eight of them are in Europe. Debt burden is a function of the total owed, combined with any public budget surplus or deficit, and the amount by which the overall economy is growing or shrinking.

If Japan was the debt basket case of the world in 2011, with net government debt equivalent to almost 129 per cent of GDP, a primary budget deficit approaching -5 per cent and GDP shrinkage of around 0.8 per cent annually, then Ireland came in second place, with net debt of around 70 per cent a budget deficit over two per cent and the cost of financing all that debt shrinking GDP by around 14 per cent a year.

In fourth to sixth places were Greece, with a net debt of 125%, Portugal (75%) and Spain (46%).

Greece: bad but not quite the worst

The USA (75% public debt but an economy growing at almost three per cent annually), finished seventh with the final spots occupied by France (60%), Belgium (81%) and Italy, with net public debt of almost 101% of GDP.

You'll have spotted that leaves third place unaccounted: Step forward the UK; running a budget deficit of some four per cent, a net public debt of more than 62% and an economy almost flatlining at 0.8% annual growth.

So why isn't Britain being pilloried by the money markets in the same way as Greece, Ireland, Portugal, Spain or Italy?

The answer to that appears in the second part of this article, along with the reasons why debt matters.

Written by Nick Valentine

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Last update: 13 February 2015

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