Historically, the debt of a country, both public and private, tends to grow over time in positive correlation with the size of the economy, with the notable exception of sudden defaults that wipe out large portion of debt. Hence the huge size of total debt cannot provide per se enough information about its sustainability. Nor is it possible to infer that low total debt is a sign of financial stability. Indeed, it is more likely that a very low level, or even the absence of debt, would imply a complete lack of confidence such as to exclude all national economic agents from international credit markets, as was the case in Argentina in the five years following the dramatic 2002 default. [...]
Global rankings, by using this more suitable measure, are reversed: Luxembourg ends up in first place with a total debt equal to 434 percent of GDP, almost all composed of corporate debt. At a distance, we observe Japan’s debt total hovering at 373 percent characterized by a preponderant weight of the public component (216 percent). The high incidence of both public and private debt places France, Spain and the United Kingdom in the top eight while Italy appears only in 9th place, with a well-balanced total debt ratio of 265% percent of GDP, due to low household and corporate debt that offsets the impact of consistent public debt.
But even a limited debt to GDP ratio cannot be considered a sign of virtue or economic health. At the bottom of the rankings stand out the paradoxical cases of Argentina and Turkey. Although both countries have total debts under control (private debt virtually non-existent in Argentine and Turkish public debt at the ridiculous value of 28 percent of GDP) they are still in danger of losing access to markets due to a currency and balance of payments crises. In a glaring apparent paradox, short-term interest rates are at 70 percent in Argentina’s low-debt financial environment and stably negative in the Japan of the monstrous debt. [...]
There’s more. Official statistics do not consider the troubling issue of “implicit debt”, i.e. the burden represented by the present value of financial commitments made by governments on pensions and healthcare. In general, these future debts do not appear in the national accounts for well-founded reasons connected to the difficulties in estimating costs spread over very long time horizons. If these hidden charges were to be taken into account, US debt would, for example, quintuple to over $100trn. But Spain, Luxembourg and Ireland would be in the worst shape, since they would see their liabilities rise by more than tenfold, up to over 1000 percent of GDP in the Irish case. On the other hand Italy, from the point of view of implicit debt, under current legislation is the most virtuous European country.
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