The Next Global Financial Crisis: Public Debt


The cloud of the global financial meltdown has not even cleared, yet another crisis of massive proportions looms on the horizon: global sovereign (public) debt.

This crisis, like so many others, has its root in the free flow of credit from the preceding economic boom years. The market prices of assets were rising steadily. Rising valuations, especially where they were based on improving revenues from robust economic activity, led to rising income streams for governments. This encouraged governments to borrow more, perhaps often to expand services – and the bureaucracy required to offer services – although sometimes to improve infrastructure.

At the same time, rising market prices for financial assets encouraged more savers and investors into the market. That led to an increasing supply of investable funds, which drove demand for sovereign and municipal debt (in addition to the mortgage-backed securities). This process, driven by the financial services industry instead of the real economy, is eerily similar to the driving forces behind the “subprime crisis.” The demand for public offerings pulled more debt issuance out of borrowers with seemingly little concern for repayment: the financial sector gains its profits from issuance fees, trading fees, underwriting fees, etc. As in the case of mortgages, it will be those who buy and hold the debt, along with the borrowers, who will suffer the consequences.

Certainly, emerging nations took advantage of the depth of rich nation capital markets to increase their debt through public offerings. At the end of June 2009, only Italy, Turkey and Brazil were covered by more credit default swap contracts than JP Morgan Chase and Bank of America. In addition to those two global banks, Goldman Sachs, Morgan Stanley, Deutsche Telekom AG, France Telecom and Wells Fargo Bank all have more credit derivate coverage than the Philippines.

Yet there is clearly a potential default problem here. Gross credit default swaps outstanding for the debt of Iceland are equal to 66 percent of GDP, about 20 percent of GDP for Hungary and the Philippines and around 18 percent for Latvia, Portugal, Panama and Bulgaria. If these countries default on their debt, those global banks who sell credit derivatives will be making enormous payments – whether or not the defaulting countries receive any support or bailouts from international donor organizations (like World Bank or International Monetary Fund).

The table below shows the GDP for the countries named in the most credit default swap contracts (as most recently reported to Depository Trust and Clearing Corporation). For each sovereign (country, state or city), we show the value of their public debt both as a figure and as a percent of GDP. The telling factor here is that the “financial markets,” if they are to be believed, judge these entities as more likely to experience “a credit event” than others. A credit event, as we learned when the AIG saga unraveled can be anything from a decline in the market price of debt to an outright default on payments.

Sovereigns named in most credit default protection*
Sovereign Entity  GDP (2008)  Share World GDP (est) Public Debt (current) Debt % GDP
JAPAN  $     4,348,000,000,000 8.6%  $  7,408,992,000,000 170.4%
REPUBLIC OF ITALY  $     1,821,000,000,000 3.4%  $  1,888,377,000,000 103.7%
HELLENIC REPUBLIC (Greece)  $        343,600,000,000 0.4%  $      309,583,600,000 90.1%
KINGDOM OF BELGIUM  $        390,500,000,000 0.6%  $      315,524,000,000 80.8%
STATE OF ISRAEL  $        200,700,000,000 0.4%  $      151,929,900,000 75.7%
REPUBLIC OF HUNGARY  $        205,700,000,000 0.3%  $      151,806,600,000 73.8%
FRENCH REPUBLIC  $     2,097,000,000,000 3.8%  $  1,404,990,000,000 67.0%
PORTUGUESE REPUBLIC  $        237,300,000,000 0.4%  $      152,346,600,000 64.2%
FEDERAL REPUBLIC OF GERMANY  $     2,863,000,000,000 4.7%  $  1,792,238,000,000 62.6%
UNITED STATES OF AMERICA  $   14,290,000,000,000 21.4%  $  8,688,320,000,000 60.8%
REPUBLIC OF AUSTRIA  $        325,000,000,000 0.5%  $      191,100,000,000 58.8%
REPUBLIC OF THE PHILIPPINES  $        320,600,000,000 0.5%  $      181,139,000,000 56.5%
KINGDOM OF NORWAY  $        256,500,000,000 0.3%  $      133,380,000,000 52.0%
ARGENTINE REPUBLIC  $        575,600,000,000 0.8%  $      293,556,000,000 51.0%
REPUBLIC OF CROATIA  $           73,360,000,000 0.1%  $        35,873,040,000 48.9%
REPUBLIC OF COLOMBIA  $        399,400,000,000 0.6%  $      191,712,000,000 48.0%
UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND  $     2,231,000,000,000 3.5%  $  1,053,032,000,000 47.2%
REPUBLIC OF PANAMA  $           38,490,000,000 0.0%  $        17,859,360,000 46.4%
KINGDOM OF THE NETHERLANDS  $        670,200,000,000 0.3%  $      288,186,000,000 43.0%
MALAYSIA  $        386,600,000,000 0.3%  $      165,078,200,000 42.7%
KINGDOM OF THAILAND  $        553,400,000,000 0.9%  $      232,428,000,000 42.0%
REPUBLIC OF POLAND  $        667,400,000,000 0.7%  $      277,638,400,000 41.6%
FEDERATIVE REPUBLIC OF BRAZIL  $     1,990,000,000,000 2.7%  $      809,930,000,000 40.7%
SOCIALIST REPUBLIC OF VIETNAM  $        241,800,000,000 0.5%  $        93,334,800,000 38.6%
KINGDOM OF SPAIN  $     1,378,000,000,000 1.8%  $      516,750,000,000 37.5%
REPUBLIC OF TURKEY  $        906,500,000,000 1.1%  $      336,311,500,000 37.1%
KINGDOM OF SWEDEN  $        348,600,000,000 0.6%  $      127,239,000,000 36.5%
SLOVAK REPUBLIC  $        119,500,000,000 0.2%  $        41,825,000,000 35.0%
REPUBLIC OF FINLAND  $        195,200,000,000 0.3%  $        64,416,000,000 33.0%
REPUBLIC OF KOREA  $     1,278,000,000,000 1.4%  $      417,906,000,000 32.7%
IRELAND  $        191,900,000,000 0.4%  $        60,448,500,000 31.5%
REPUBLIC OF INDONESIA  $        915,900,000,000 1.7%  $      275,685,900,000 30.1%
REPUBLIC OF SOUTH AFRICA  $        489,700,000,000 0.5%  $      146,420,300,000 29.9%
CZECH REPUBLIC  $        266,300,000,000 0.5%  $        78,292,200,000 29.4%
REPUBLIC OF PERU  $        238,900,000,000 0.2%  $        57,574,900,000 24.1%
REPUBLIC OF ICELAND  $           12,150,000,000 0.0%  $          2,794,500,000 23.0%
REPUBLIC OF SLOVENIA  $           59,140,000,000 0.1%  $        13,010,800,000 22.0%
KINGDOM OF DENMARK  $        204,900,000,000 0.4%  $        44,668,200,000 21.8%
UNITED MEXICAN STATES  $     1,559,000,000,000 1.9%  $      316,477,000,000 20.3%
BOLIVARIAN REPUBLIC OF VENEZUELA  $        357,900,000,000 0.6%  $        62,274,600,000 17.4%
REPUBLIC OF LATVIA  $           39,980,000,000 0.1%  $          6,796,600,000 17.0%
REPUBLIC OF BULGARIA  $           93,780,000,000 0.2%  $        15,661,260,000 16.7%
PEOPLE'S REPUBLIC OF CHINA  $     7,800,000,000,000 7.7%  $  1,224,600,000,000 15.7%
ROMANIA  $        271,200,000,000 0.3%  $        38,239,200,000 14.1%
REPUBLIC OF LITHUANIA  $           63,250,000,000 0.1%  $          7,526,750,000 11.9%
UKRAINE  $        337,000,000,000 0.6%  $        33,700,000,000 10.0%
REPUBLIC OF KAZAKHSTAN  $        176,900,000,000 0.3%  $        16,097,900,000 9.1%
RUSSIAN FEDERATION  $     2,225,000,000,000 4.3%  $      151,300,000,000 6.8%
STATE OF QATAR  $           85,350,000,000 0.2%  $          5,121,000,000 6.0%
STATE OF NEW YORK  $     1,144,481,000,000 2.1%  $        48,500,000,000 4.2%
STATE OF CALIFORNIA  $     1,801,762,000,000 3.4%  $        69,400,000,000 3.9%
REPUBLIC OF CHILE  $        245,300,000,000 0.3%  $          9,321,400,000 3.8%
REPUBLIC OF ESTONIA  $           27,720,000,000 0.1%  $          1,053,360,000 3.8%
STATE OF FLORIDA  $        744,120,000,000 1.4%  $        24,100,000,000 3.2%
THE CITY OF NEW YORK  $     1,123,532,000,000 2.1%  $        55,823,000,000 **
*List from Depository Trust and Clearing Corporation. [] Dubai was also on this list, but debt and GDP data were not available.
**NYC GDP includes entire NY-NJ-PA metropolitan statistical area; debt is for City of NY only.
Countries in Italics have never failed to meet their debt repayment schedules (Reinhart and Rogoff 2008); Thailand and Korea received IMF assistance to avoid default in the 1990s.

The obvious consequence is that a crisis in sovereign debt would cause problems not just within those nations, states or cities – but also among their trading and economic partners, among their lenders (banks, sovereigns or international donor organizations) as well as the global financial institutions who sold default protection through the credit derivatives markets. The financial impact would be more than anything we have seen so far: most global financial institutions received bailouts from their sovereign governments to soften or at least delay the impact of the September 2008 financial crisis. Yet, I believe the more dire consequence of a widespread sovereign debt crisis, if there is one, will be civil unrest fomented by the deterioration in governments’ critical functions that will result from their weakened financial positions.

Policy makers will have few options available across the globe to combat this crisis. The rich world’s governments have not been able to contain their debt burdens through budgetary discipline alone. Between Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner, they’ve done everything except load the helicopter with dollar bills to finance the bailout with freshly-minted U.S. dollars.

Policymakers are just as likely to precipitate a financial crisis as any other investor or borrower – they seem to have no prescient knowledge of the dangers associated with over-speculation, lack of solid accounting practices, balancing a budget, etc. How else do we explain their dependence on borrowing? Basic accounting principles – not to mention ideas going back at least to the biblical story of Joseph and the Pharoah – would guide users to monitor income and spending; actuarial analysis directs us to save during times of “feast” and spend the surplus during times of “famine.”

Yet the United States government and others have already decided to monetize their financial problems at levels not seen before. I shudder to even think what sovereign default would mean to a large-country (G8, for example); however, I deem such a scenario as highly unlikely. A quick look at the table indicates the countries that have never defaulted or even rescheduled a debt payment in their history. The defaults will more likely come from spendthrift small countries, or big states like California.

The world economy has encountered these debt situations before. But in this environment, a sovereign debt crisis would be unlike anything we have experienced in the past. Not only have financial markets become more globally integrated – with countries borrowing and lending across national borders with ease – but the use of credit derivate products has increased the chance of a default turning into a global catastrophe. These derivatives will have a multiplier effect on every sovereign debt default. We know for a fact that credit default swap contracts are written without being limited to the total value of the underlying assets. Therefore, there could be nine to fifteen times as many credit default contracts to be paid by global banks as there is debt in default.

Today there are outstanding about $2 trillion of credit default swaps contracts on just fifty of the world’s 200 nations. These contracts could come payable under even the most modest credit event, spreading the damage globally even before debt-service payments are missed. For example, it is now known that AIG’s Financial Products Division wrote contracts that became payable when the market price of debt decreased, regardless of whether or not the borrower had missed a payment. These circumstances did not exist during any previous debt crisis, including the most recent default cycle, the emerging market debt crises of the 1980s and the 1990s. If widespread sovereign defaults happen, we can expect to see something new and potentially much more damaging.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

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This is happening really fast now. Suffolk County in NY declared a fiscal emergency today, reported on Thanks for keeping this article at the top.


Follow me on Twitter: SusanneTrimbath

I feel strongly about it and

I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.
Chicago investment advisors

RE: Feel strongly about topic

"shamp": Thanks for your comment and request for an update. This topic is playing out in the headlines every day. I was hoping there would be some logical "break in the action" where I could do a follow-up report. But as it is playing out, even the OECD is now warning about the potential for social unrest as a result of these financial collapses. Glimpsing the potential, we are witnesses to the #Occupy movement around the world, disruptive labor actions across Europe, etc.

I'll work on a follow-up article in the coming weeks.


Follow me on Twitter: SusanneTrimbath

Financial crisis had impacted

Financial crisis had impacted the whole world. The unemployment, debt, mortgage defaults and credit crunch had surrounded the economy. Now situation is much better as economy is reviving.

I am agreed with the post

I am agreed with the post you have shared and I really enjoyed the article you have shared. It has many features that other website don't have. Thank you for posting. download full version software

Well, the Treasury takes

Well, the Treasury takes special measures to delay the onset of the offense. However, Geithner called for legislators to start acting as soon as possible to increase the cap, explaining that any delay or failure can be a disaster for the U.S. economy and citizens. However, it is difficult to predict what may happen to the debt ceiling was never reached before, however, financial experts say will not help at all. Furthermore, if the strict policy will be established, the United States are unable to fund programs and pay its bondholders in full. This will happen because this country will not receive sufficient revenue to administer all accounts. Moreover, the state of financial analysis that those consequences will be essential not only for the U.S. economy, but to the world. Moreover, the student loan debt first time ever in the United States and the total amount is expected to hit $1 trillion by the end of 2011. In fact, the current financial situation is not very inspiring and a lot of ordinary people experience difficult financial times and has to take cash advance to improve their living conditions or solve financial difficulties.

Not First Episode with Debt Ceiling

Hi, thanks for your comment but part of what you say is not true. The US did hit the debt ceiling before. Congress has had to raise it 74 times since 1962. There were days in the late 1980s when all the federal parks were closed because the US federal government was shut down awaiting authorization to raise the limit. Check this article from The Guardian for some additional facts.


Follow me on Twitter: SusanneTrimbath

It's coming!

Everyone knows it... the world financial crisis is coming and it's going to hurt. There will be no food they say... Stores will close and people will flee to rural regions. Money will evaporate quickly. At least this time they can't blame that on the poor people's mortgage defaults or debt settlement outbreaks. Now it's time for governments to admit they were wrong about borrowing money and hopefully take the consequences or run away like cowards. It's near and it will be the sight of the century.

Financial crises is one of

Financial crises is one of the biggest issue as i can see almost all the countries are suffering from big financial crises since 2008. Problems are everywhere, hence all the countries should come close to solve the issue. Every part in this world has been effected by this crises.

An Eye Opener

Economists generally believe the best level for our National Debt (ND) is zero - that is, no debt at all. They also believe we must balance the budget each and every year. If our National Debt is "considerable", we must "tighten our belts", sacrifice, increase taxes, and do whatever is necessary so we can show a surplus, and get that National Debt down to zero where it belongs, even if it "necessity- imitates" a higher unemployment rate and nipping a boom in the bud! the finance intimates the whole world.