National Debt, how does it work?
When a country is faced with a slower economic growth and the GDP is gradually slipping down, a country is at the risk of not being able to pay back its debts. The government receives lesser in tax revenue due to a slower economic activity and a rising unemployment rate, leading to inflation and a shift in the demand and supply curve. As the demand of commodities drop so does their production and to be able to keep the economy running he government is forced to borrow huge sums of money, these funds will eventually need to repaid and accumulate as public debt. This kind of a national-debt is not always bad, it is pretty normal for any country to have a debt as it helps the country run its operations more smoothly. However, excess of it can endanger a country’s future, exposing it to risks such as an economic instability and the underlying reasons, which lead to the debt on the first place.
Which country has the most debt?
Here’s the list of the 20 countries with highest debt:
|Ranking||Countries||Total External Debt (USD)|
The debt is expressed in dollars and is computed as of December 31, 2012. The data came from the “World Factbook” of the CIA. It includes both public and private debt. As shown in the list, there is a clear predominance of European countries. This should not surprise anyone who has read the headlines in recent years.
Now, how we should look at it? The right thing is to look at that debt compared to the GDP of that country, that is what the country produces each year. GDP data come from the World Bank. It’s not surprise to see the countries known as PIIGS, and that led to the debt crisis in Europe in 2011 and 2012: Portugal, Ireland, Italy, Greece and Spain.
The GDP to Total Debt ratio is only an indication of the strength and leverage of a country. There are several countries in apparently worse than the so-called PIIGS situation, but their situation is not as critical because they have a combination of: higher growth, better trade balance and better fiscal situation.
One of the most reliable and widely agreed upon standard of comparison in between debt levels of countries happens to be the “debt-to-GDP” ratio: which is a ratio indicating a country’s total debt in proportion to its GDP.
The top 5 countries with the highest of these ratios are namely Japan standing at a baffling 230%, the technological advancement and the spur of growth in the region makes it almost unbelievable that it is the country with the highest levels of debt. Next on our list, comes Greece, at about 177%, followed by Lebanon with a ratio of 134%. Jamaica and Italy are close by with 133% and 132% respectively, whilst Portugal stands fifth with a 130%!
All of these countries, apart from Lebanon, not only have huge debts but also struggle with a lower or negative GDP growth rates, this is not a good news, and their economies are in endangered. It is no hidden fact that Greece has already stumbled across a financial turmoil on account of its inability to be paying off its debts. Japan may be next, but there economic growth is not yet stagnant and they are able to make a smooth transition where as other countries with higher debt levels and comparatively lower economic growth rates face grave default risks, namely Cyprus and Italy are on the verge of bankruptcy.
As long as these countries make smart moves and use the loans to effectively stimulate their economies, they can not only pay back the dues but also experience economic growth, the trouble comes in when the governments fail to increase GDP and continue to borrow. This has been the case with Greece, the debt-levels got so high that the nation was forced to default on their loans.
Moreover, the countries which boost the lowest debt-ratios are those with a stable source of revenue generation such as the oil and gas producing countries, they do not need to borrow money to run their economy their revenues from exports do it just fine. However, it must be taken into account that by the IMF standards, there is no definite or simple threshold for an unsafe “debt-to-GDP”, but IMF has concluded that higher debt-levels find a close association with a more volatile growth.