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Finance • Global Citizen

Five Countries with the Highest Debt-to-GDP Ratios

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A country’s debt-to-GDP ratio is a great indication of its 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.

In this article, we list five countries with the highest debt-to-GDP ratios and explore the reasons why. 

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Countries That Run Into Debt Problems

As the name suggests, the debt-to-GDP 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 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 disperse 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 debt-to-GDP ratios rather than Japan. 

Countries that run into problems, unable to repay debt have the option to increase their taxes or reduce their government’s spending. Other measures include cutting interest rates to make it easier to borrow from commercial banks.

5. Portugal (127%)

The Portuguese banking crisis has been a well-documented problem, as is the deep pandemic-induced recession the country suffered more recently.  

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. 

In 2021, Portugal’s state owned Resolution Fund injected 112 million euros into Novo Banco, which emerged from the collapse of Banco Espirito Santo in 2014.

The Portuguese banking sector has received over  3 billion euros in capital injections since 2018. Meanwhile, the public-sector borrowing, at 127% to GDP ratio, is one of the highest in the EU. 

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. Despite an upturn as tourism recovers to pre-pandemic levels, Portugal has the EU’s third-highest debt, behind only Greece, and Italy. 

4. Italy (140%)

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. 

A legacy of the great recession, its banks have a heightened exposure to non-performing loans. The banks tried to securitize and sell off the bad debt to investors but there have been no significant improvements.

Its recent economic woes have compounded an already weak situation. A backfiring green building incentive has hurt  its tax revenues and increased the deficit. 

Adding to the problem is the sluggish economy. Growth has slowed dramatically, halting a post-pandemic bounce in 2021 and 2022, and is forecast at only 0.9% in 2023. 

3. Lebanon (172%)

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. 

In fact, the IMF has warned recently that in the absence of reform the country will continue to see hyperinflation, and public debt will reach nearly 550% of GDP by 2027.

2. Greece (193%)

Greece’s troubles were compared to that of the US during the Great Depression. The economy shrunk by almost a quarter, its credit rating was reduced to near-junk status, and its government was left scratching its head.

The powers-that-be, namely the IMF and the ECB, tried 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 the EU and the outside world, promising the Greek people that they would get back to their old “Greek ways.” 

That said, the government has announced better news in the form of a surplus of around 1.5 billion euros in the first six months 2023, from a deficit of €3.8 billion for the same period in 2022. The full-scale return of tourism is no doubt a factor, but questions remain as to whether this progress can be sustained.

1. Japan (262%)

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, Jamaica, and Bhutan (because of its reliance on Indian financial assistance). European nations such as Cyprus, Belgium, and Spain 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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