The first step an economist has to take in order to analyze a situation is to decide what data is more relevant. These days, the talk is on the debt burdens of sovereign countries and where these will lead. In short, after Greece, who is next? Are we going to see a similar debt crisis for the U.K. and U.S. debt?
It is natural in this environment for people to try to understand the situation. Especially, if the snowstorm catches them unguarded, like in Greece. People there wonder what hit them and why they are going through what they are going through. Ignorance makes them blame the markets, the bad speculators, their bad luck, and some even attribute their debt crisis to a plan of superior centers of power for extinction of the Greek people. Others, more calmly, try to find a rational explanation and there the confusion begins. What numbers to look at?
This confusion is fed by the media, who in their own ignorance pick any set of numbers that support one or the other story, depending on the conclusion they want to make. Sometimes though, even the specialized economists do not unanimously agree on the measures that best describe a situation. One reason for this potential disagreement can be that there is more than one proposed story/explanation which are based on looking at different variables.
In our case the question is, what debt measures are relevant? For example, some think that figures on private debt are important to bond vigilantes and perhaps in an environment were money markets are in stalemate the potential inability of firms to rollover their debt may make them turn into the governments for help, like many banks have already done, whereas others strongly feel that using figures of aggregate external debt is misleading, feeding into a doom-mania. This disagreement would not exist if the numbers in public debt and external debt were the same. However, they are very different with each other, (compare estimates of 2009 public debt by country with 2009 estimates of external debt by country). The short answer to the posed question in the beginning of the paragraph is that all measures can be important, which is determined by the proposed explanation. But let's analyze the possible scenarios and the complexity of making comparisons between one country's current crisis with another country's current or older crisis.
Positive Analysis of Sovereign Debt
Choosing between these two approaches is not straightforward. First, it requires a detailed knowledge of the specific country's economic structure. Second, and most importantly, it depends on the tastes, in each specific period and case, of the bondholders. Understanding what matters in the bond markets entails guessing the behavior of the bondholders and how they perceive the economic outlook of the country under consideration. Each of the two components by itself is an aggregate of other forces or pieces of information which can be categorized into fundamental or psychological factors.
1. Debt Outlook
Let us start with the first by saying that there are four possible combinations of the debt outlook of each country: The best scenario is that both the public and private debt are small, the worst scenario is that both the public and private debt for a country are big, and in between situations that one of two is big and the other small. In the first scenario it is clear that the country has a big problem. Perhaps the crisis is very near and the authorities should take immediate abrupt steps to bypass it if they can, or choose to default. In the second scenario there is really no problem. A lot of debate though exists about the two in-between cases.
If the public debt is small and the private debt big, it could pose a problem for the country. In this case it all depends on whether the debt markets function, on the state of the world economy, on the size of the sovereign economy, and on the phase of the business cycle we are in, which largely dictates the economic soundness of the firms themselves. This is the case about Spain, which has a low public debt of 53% of Spain's GDP and a relatively high private debt resulting to an external debt of 165% of Spain's GDP.
Greece, on the other hand is an example of a country with high public debt, estimated at 113% of GDP for 2009, and a relatively low private debt, given that its external debt is estimated at 167% of GDP for 2009. However, in the current state of the world economy the relatively low private debt cannot help insight of the ballooned public debt, the lack of entrepreneurship, the lack of profitable projects, the tax evasion, and the corruption in the public and private sector. These examples highlight the importance of differences in the structure of economy.
2. Bondholders' Identity
Finally, we turn our attention in the identity and tastes of the bondholders which is a component of equal if not bigger importance than the economic outlook of each country. A clear contrast of the different impact different groups of investors can have is provided by comparing Greece and Japan. Japan's public debt is the second in the world estimated to be 189% of GDP for 2009, whereas its external debt of both the private and public sector is estimated to be just 42% of GDP for 2009. This means that all Japanese debt is held by Japanese hands, whereas most of Greece's debt is held by foreign investors, mainly European banks. Given that Japanese have no interest in bringing down their own country, as well as their known habits for saving, which makes them very patient, clearly contrasts this group of investors with the foreign investors who invest in Greek debt.
Different Debt Measures
Even though the logic of analyzing each case -- positive economics -- used above is sound, the data used are not exactly comparable. This does not mean that the conclusions are not valid, as the correct data may be very close to the ones available. But the point I want to make is that there are a lot of different ways one can construct data numbers that measure quantities that sound almost the same but they are not and that the specific construction can be very important in determining the conclusions we reach.
For example, apart from the crude distinction I used above, between public and private debt, which people these days use freely and sometimes interchangeably, there are other more subtle separations of debt. In this fashion, we have Gross Public debt[1] and Net Public debt[2] here. In addition, there is Internal debt (the total public and private debt owed to residents) and External debt (the total public and private debt owed to nonresidents repayable in estimates for which one can find foreign currency, goods, or services).
The bottom line of all this is that which measure one uses is extremely important as different measures have very different values. So one has to first decide which measure is most relevant, and then in order to make comparisons between two countries, one has to make sure that the structures of the two economies are similar in a huge array of other dimensions, that we analyzed above. In short, making comparisons is extremely tricky, but at least we should be aware of the complexity of the problem and the differences of the existed measures.
BACK TO POST1. Gross debt consists of all liabilities that require payment or payments of interest and/or principal by the debtor to the creditor at a date or dates in the future. This includes debt liabilities in the form of SDRs, currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other accounts payable. Thus, all liabilities in the GFSM 2001 system are debt, except for equity and investment fund shares and financial derivatives and employee stock options. Debt can be valued at current market, nominal, or face values (GFSM 2001, paragraph 7.110).
BACK TO POST2. Net debt is calculated as gross debt minus financial assets corresponding to debt instruments. These financial assets are: monetary gold and SDRs, currency and deposits, debt securities, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivable.
