Monday, June 18, 2012

Time - Which Advanced Economy Has the Most Debt?

The Most Indebted Countries

May 18, 2012
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Athens, Greece

With all the talk of Greece’s impending exit from the euro zone, debt is once again in the headlines. Greece’s massive public sector debt, coupled with its inability to devalue its currency, has put the country at risk of default. But the global economy is straining under the weight of more than just public sector debt. In the developed world, consumers, financial institutions, and other corporations have each accumulated unprecedented levels of debt — and how that total debt is managed will ultimately determine the economic fate of the global economy going forward. The following is a look at the total debt of the world’s largest mature economies — in ascending order of indebtedness — drawn from a recent presentation by Jeffery Gundlach, CEO of DoubleLine Funds.

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Toronto, Canada

With an unemployment rate of 7.3% and a projected federal budget deficit of just 1.5%, Canada is avoiding many of the economic headaches that have plagued other nations. Fiscally conservative leadership combined with robust regulations have kept Canadian banks from melting down during the crisis that crippled many American and European firms. Those factors, combined with low public debt levels, allowed a nimble response to the crisis from the Canadian government. Still, observers are worried that low interest rates and high levels of household debt are now putting the country at risk of an American-style real estate bubble. As McLean’s wrote in February, “pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt.”

Total Debt as a percentage of GDP: 276%

Household: 91%

Nonfinancial Corporations: 53%

Financial Institutions: 63%

Government: 69%

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Sydney, Australia

Australia’s booming natural-resources industry and proximity to fast growing economies like China helped it weather much of the financial crisis. Australia has also done a good job of reigning in its public debt – with the federal government promising a budget surplus this year of $1.52 billion. Such fiscal restraint has helped Australia achieve the lowest public debt-to-GDP ratio of any country on our list, but the island nation is not without its own challenges. A potential hard landing in China could damage Australia’s export economy, and large consumer and financial institution debt means neither the average citizen nor the country’s large banks have much of a cushion to withstand another global economic downturn.

Total Debt as a percentage of GDP: 277%

Household: 105%

Nonfinancial Corporations: 59%

Financial Institutions: 91 %

Government: 21%

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Berlin, Germany

Germany has been in the headlines for its hardline support of austerity measures for Europe’s peripheral economies. With low unemployment and a growing economy, Germany is in a position to make demands – although many observers are arguing that it should do more to stimulate the rest of the euro zone. At the very least, German policy makers seem to be tolerating more domestic inflation to help peripheral euro zone members become more competitive.

Total Debt as a percentage of GDP: 278%

Household: 49%

Nonfinancial Corporations: 87%

Financial Institutions: 87 %

Government: 83%

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New York, USA

Debt has dominated the national debate since the U.S. escaped economic free-fall in early 2009. Conventional wisdom suggests that America has been particularly profligate, but in fact American consumers and institutions aren’t worse off than their counterparts in other developed nations.  The most striking aspect of these numbers is the small amount of debt that American financial institutions have relative to U.S. GDP. This could ultimately be a weakness for the financial system, however, as the debt of U.S.-based financial institutions isn’t low in absolute terms, only in comparison to America’s very large GDP. The large size of the American economy (and the proportionate financial capacity of the American government) has served to reinforce the market’s belief that too-big-to-fail banks will always get bailed out.

Total Debt as a percentage of GDP: 279%

Household: 87%

Nonfinancial Corporations: 72%

Financial Institutions: 40 %

Government: 80%

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Seoul, South Korea

It is a truism that every crisis is also an opportunity, and South Korea used the financial panic of 2008 as a means to solidify its status as one of the world’s leading economies. While the won, South Korea’s currency, took a pounding in 2009, this only buttressed the country’s export and tourism markets, which powered the nation back to solid growth in 2010. All the while, the world’s 15th largest economy has maintained low budget deficits and government debt. Of course, it is not immune to the same headwinds that other mature economies face. South Korea is rapidly aging, which will put pressure on government budgets going forward. It is also dominated by a few large conglomerates like the world-famous Samsung, which are dealing with high debt levels and must prove their ability to innovate as world markets continue to become more competitive.

Total Debt as a percentage of GDP: 314%

Household: 81%

Nonfinancial Corporations: 107%

Financial Institutions: 93%

Government: 33%

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Rome, Italy

Since the ouster of former Primer Minister Silvio Berlusconi, Italy has receded from the headlines as extra-squeaky wheels Greece and Spain get the media grease. But the world’s 8th largest economy is still perilously close to bond yields that would render its public-debt burden unmanageable. Though Italians have low amounts of household debt, generous welfare-state provisions and strict labor laws have contributed to bloated government budgets and an uncompetitive economy. Technocratic Prime Minister Mario Monti is seeking to reform the Italian economy and bring government debt under control – and he’s hoping bond markets cooperate long enough for him to be successful.

Total Debt as a percentage of GDP: 314%

Household: 45%

Nonfinancial Corporations: 82%

Financial Institutions: 76%

Government: 111%

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Paris, France

Though the bond markets have yet to turn on the second most powerful member of the euro zone, a look at France’s debt figures show why some are worried they might. The French government and corporations are stretched to their limits debt-wise, and though newly elected French President Francois Hollande won his post on a campaign to fight austerity, he’s still sticking to an EU commitment to cut France’s deficit to 3% of GDP by 2013. And while France hasn’t had a balanced budget in forty years, Hollande seeks to match revenues and expenses by 2017.  The new President indeed has a tough row to hoe as he works toward the seemingly opposing goals of reigning in budgets and promoting growth, but perhaps the debt levels below are just the motivation he and his countrymen need to get the job done.

Total Debt as a percentage of GDP: 346%

Household: 48%

Nonfinancial Corporations: 111%

Financial Institutions: 97%

Government: 90%

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Madrid, Spain

Spain has by some measures superseded Greece and Italy as Europe’s most troubled economy. But Spain took a much different path to perdition than it’s Mediterranean neighbors. Spain’s troubles were caused by a housing bubble that rivaled and possibly exceeded the real estate bubble in the U.S. From 1998 to 2006, housing prices in Spain increased 150%, with housing stock doubling in that same time period. When the bubble burst, demands of the welfare state and bank bailouts caused  government debt to balloon.

All the while, this bubble masked competitiveness problems that had been mounting in Spain over the past several decades. The result is an economy that is up to its eyeballs in debt and suffering from depression-level unemployment. But efforts on the part of the Spanish government and financial institutions to reduce debt have only sunk the economy deeper in trouble. As my TIME colleague Michael Schuman wrote last month, “Whatever numbers you look at, Spain is in a death spiral, a self-defeating circle of recession and austerity that is sending one of Europe’s most important members into an economic dark ages. Spain today represents all of the failings of the monetary union, from its misconceived inception to its misguided approach to the debt crisis.”

Total Debt as a percentage of GDP: 363%

Household: 82%

Nonfinancial Corporations: 134%

Financial Institutions: 76%

Government: 71%

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London, England

The United Kingdom has recently entered a double-dip recession, due to the double-whammy of the euro zone crisis — which is endangering its biggest trading partners — and an aggressive austerity program instigated by the conservative government of Prime Minister David Cameron. But the British economy may have been able to survive Europe and austerity if its corporations and households weren’t leveraged to the hilt as well. Consumers, businesses and especially financial institutions are unable to spend freely given their current debt levels. You might think U.S. banks were irresponsible, but by most measures British banks fared much worse during the financial crisis, requiring bigger bailouts by the U.K. government — especially when compared to the size of its home country.

Total Debt as a percentage of GDP: 507%

Household: 98%

Nonfinancial Corporations: 109%

Financial Institutions: 219%

Government: 81%

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Tokyo, Japan

By the first three measures of debt on our list, Japan is no worse off than its developed peers, but Japan’s government debt comes in at a whopping 226% of GDP. Japan’s rapidly declining population is increasing in the ratio of retirees drawing benefits to workers paying for them, and causing government debt to skyrocket as a result. The slowing of population growth is occuring all over the developed world, but in Japan it’s happening at breakneck speed. The Associated Press reports that the Japanese population will shrink by one-third by 2060, and as the country adjusts to these demographic shifts, it will have to decrease benefits and raise taxes, too. (Luckily for the Japanese, they are starting with the lowest tax burden in the OECD — just 17% of GDP.) Meanwhile, the ratings agencies aren’t particularly confident that the country will find the political will to enact changes that could begin fixing its debt problem.

Total Debt as a percentage of GDP: 512%

Household: 67%

Nonfinancial Corporations: 99%

Financial Institutions: 120%

Government: 226%

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