Thursday, October 13, 2011

Public Debt Levels Alone Don’t Tell the Whole Story

Some governments can no longer borrow money and others can do so only at relatively high interest rates. Reducing budget deficits has become a prime goal for nearly all countries.

The New York Times has compared/examined different European countries debt level including the private debt based on data from IMF. Here is a summary of the story:

In 2007, before the credit crisis hit, Ireland appeared to be one of the least indebted countries in the euro zone, and Italy was among the most indebted. In the last week, the International Monetary Fund forecast that by 2013 Ireland’s debt, as a percentage of gross domestic product, would be greater than Italy’s. One reason is that Ireland’s private sector was heavily indebted in 2007, and many of those debts turned out to be bad ones. Italy’s private sector, on the other hand, had relatively little debt.

But looking only at government debt totals can provide a misleading picture of a country’s fiscal situation, as can be seen from the accompanying tables showing both government and private sector debt as a percentage of gross domestic product for eight members of the euro zone. The eight include the largest countries and those that have run into severe problems.

Net debt as a percentage of GDP
The charts show debt figures for 2007 and 2010 for eight members of the euro zone, expressed as a percentage of gross domestic product for both the public and private sectors, and I.M.F. forecasts for public sector debt in 2013.

Click here to get a bigger image. Sources: International Monetary Fund; European Central Bank (via Rebecca Wilder)

For a country, the ability of the economy to generate growth and profit, and thus tax revenue, is more important. For the private sector, it matters greatly what the debt was used to finance. If it created valuable assets that will bring in future income, it may be good. Even if the borrowed money went to support consumption, it may still be fine if the borrowers have ample income to repay the debt.       

That is one reason many euro zone countries are struggling even with harsh programs to slash government spending. With unemployment high and growth low — or nonexistent — it is not easy to find the money to reduce debts. And debt-to-G.D.P. ratios will rise when economies shrink, even if the government is not borrowing more money.       

See the full story at The New York Times.

Geir Solem
Copyright (C) 2011 all rights reserved

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