Japan and the world's highest debt-to-GDP ratio

Japan: home to the world’s highest debt-to-GDP ratio, and a place that should scare rational investors

A country’s debt-to-GDP ratio is a great indication of a country’s reliance on sovereign debt. Debt, when used in the right proportion can spur growth but if used in the wrong proportions, can cause detrimental problems.

As the name suggests, the ratio is measured with a country’s gross debt in the numerator divided by its gross domestic product in the denominator. A debt-to-GDP ratio of 1 indicates that its debt is equal to its GDP, meanwhile ratios greater than 1 indicate an over-reliance on debt and a number below 1 indicates low debt levels. The debt-to-GDP ratio is also a good measure of the health of the economy.

However, in this complex world, there are many factors that can affect a country and it is cannot be simplified to a singular ratio. Some of these factors include the country’s economic growth prospects, the buyers of its debt, and its government’s spending plan. Basically, what this implies is that it is okay to have a high debt-to-GDP ratio if your debt buyers are local or if they are repeat buyers, if you are borrowing heavily to sustain high levels of economic growth or if your government has a great spending plan of action.

On the other hand, if a country is borrowing increased amounts to incite growth in a stagnant economy then the rating agencies will not view the country as favorably because the country does not have a corresponding growth rate or a plan of action to effectively disburse its borrowed money.

Some other reasons contributing to higher ratios include an aging population which spells a heavier burden on healthcare and other social security systems. Governments might also want to fund big projects which is why ratios might rise.

At the end of the day, creditors will want their money paid back which is why smaller or more sluggish economies such as Greece come under fire for high GDP-to-debt ratios rather than Japan. Countries that run into problems, unable to repay debt have the option to increase their taxes or reduce its government’s spending. Other measures include cutting interest rates to make it easier to borrow from commercial banks.

Here is the list of the five countries with the highest debt-to-GDP ratios:

5. Portugal (128.8%)

The Portuguese banking crisis has been a well-documented problem, and it continues to this day. Portuguese banks are riddled with bad debt with little to no capital. Their weak asset quality, low interest margins, and very little lending activity does not make them highly profitable. Its banks need liquid cash infusions ranging from 2-5 billion US$.

Meanwhile, the public-sector borrowing, at 128.8% to GDP ratio, is one of the highest in the EU. The country needed immediate assistance in 2014 and the ECB stepped forward with its bailout program at the time which seemed to rein in the country’s troubles for the time being. Other factors such as improved EU performance and cheaper oil all culminated in a steady economy but there is still a long road to recovery for Portugal.

4. Italy (132.6%)

This country’s debt-to-GDP ratio is the second-highest in the European Union. Like Portugal, Italy has a ton of bad debt that is weighing it down. The country has one of the weakest financial systems in the EU. Its banks have a heightened exposure to non-performing loans. The banks have since tried to securitize and sell off the bad debt to investors but there have been no significant improvements.

The government tried to ensure the banks that they would purchase the least risky portions of the debt but the banks did not budge. There were not enough sales to other investors either. Other countries suffering from bad debt like Italy included Spain and Ireland – both of which set up “bad banks” specially designed for the securitization of bad debt. Italy, however does not seem to want to take this step.

Further impounding on their problems is the sluggish economy. The economy is growing at rates below 1 percent every year. In fact, it grew 0.9 percent in 2016 which was the fastest growth rate the country had experienced since 2010.

3. Lebanon (139.1%)

The story of Lebanon is an unfortunate one. It appears the country is forever embroiled in some form of turmoil or the other. The war in Syria brought about the largest number of displaced Syrian refugees into the country. Adding to that, Lebanon’s intrinsic political and economic turmoil has exacerbated the country’s problems.

Because of the sizable Lebanese diaspora, one of the main contributors to the country’s GDP is remittances from around the world. These remittances are then deposited into local Lebanese banks that lend out to the government. This is a country that is still rebuilding itself post-civil war which is why it has a chronic problem of running budget deficits every year.

2. Greece (178.4%)

The Greek sovereign debt crisis first unraveled in 2010 and many bailouts later, the country is still suffering. Greece’s troubles are compared to that of the US during the Great Depression. The economy has shrunk by almost a quarter, its credit rating has been reduced to near-junk status, and its government is left scratching its head.

The powers-that-be, namely the IMF and the ECB, try to get Greece to conform to a set of, some say stringent while some say necessary, reforms. Greeks don’t like to pay taxes but they like to enjoy high pensions; these are the two areas that both the IMF and the ECB want the Greeks to change.

Greek politicians on the other hand pivot their political agendas to the existing problem by blaming EU and the outside world, promising the Greek people that they would get back to their old “Greek ways.” This spells trouble for the country because it is only half-heartedly attempting to solve its problems. The politicians have even gone so far as to claim that they can run a budget surplus of 3.5% a year – a ludicrous claim!

1. Japan (248.1%)

The country’s debt is almost double that of the other countries ranked on this list. Not only has the country’s growth stagnated for more than two decades, its Central Bank has even gone on to reduce interest rates to negative level territory.

Japan is still reeling from the ginormous asset bubble it funneled in the 80s with disproportionate stock and land valuations. When the bubble burst, trillions of dollars of wealth was lost and the subsequent political regimes have done little to solve the country’s problems since then. Shinzo Abe, current Prime Minister, and his host of “Abenomics” reforms had renewed interest in the Japanese plight but that too failed.

Abenomics was designed to reinvigorate a failing Japan; to undervalue its currency and make it more competitive against the likes of China and Korea. It was supposed to make Japanese exports more lucrative globally but that was not enough. Japan should have opened its door to immigration like Korea did.

Japan still manages to stay afloat because of its high reserves of domestic savings since the largest number of Japanese bond purchasers are local investors. The sympathetic local buyers are willing to accept the low yields and keep the company afloat somehow.

Some other notable high debt to GDP ratios include that of the US at 105.8%, Jamaica at 124.3%, Cape Verde at 119.3% and Bhutan at 115.7% (because of its reliance on Indian financial assistance). Troubled European nations such as Cyprus, Ireland, Belgium, Spain, and Portugal also have troubling ratios.

Belgium, one of Europe’s more open countries, is the new entrant to the list and its problems have exacerbated because of its government’s restrictive labor laws and tax regulations.

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Nomad Capitalist retains a network of freelance researchers around the world to supplement our ongoing research efforts. Julia, Isabella, Sadia, and Samantha hail from Egypt to Canada to Venezuela and share their findings from the ground.
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