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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RE: An Eye Opener

I wouldn't go so far as to say that there should be "no debt at all" -- leverage is useful if credit is managed wisely. Debt should be used for purposes such that the return on investment is greater than the cost of the debt. The U.S. is issuing debt very cheaply now, but still, there are limits! Check out today. He's taking comments on "how much do you worry" about the debt.

Regardless of what economists think, it is politicians who put us in debt, increase taxes, etc., etc. They are mostly lawyers and doctors; not economists or Finance Firm specialists.


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Many countries are facing the problem of financial crisis. It have effect the countries in several fields. Today, we need a strong strategy to fight against such crisis. Thanks for such valuable post.

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Update on Derivatives

Since this is the subject that won't go away, thought you might enjoy an update.

According to the Bank for International Settlements, there were $615 trillion in Over-The-Counter (OTC) derivatives contracts outstanding worldwide at the end of 2009. That's about 9 times global GDP.

In other words, the entire world would have to work for 9 year just to produce enough to pay off the derivatives -- before we had a dime left over to pay off the original assets (loans, bonds, etc.)


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Today there are outstanding

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.

This fantasy is been with us

This fantasy is been with us for quite some time. Nothing new there.
Public debt has been skyrocketing since WWII, on to the Viet Nam war
and as of late since King George went shopping for war ALL OVER THE
WORLD. Now we must pay for his intransigency and the willingness of
the Republicans to allow such travesty. But the blame is squarely on
Dubya and his allies in Congress along with Britain.
who has been allowed to play cowboys and indians with the blood and
treasure of the american people.

Totally agree with comment

Totally agree with comment above about debt and how it skyrocketing since second war.. Only when money will changes with something new, our economy will be new.. without debts...!!

RE: fantasy debt

Moody's is just now warning of the potential for "social unrest" -- You read it here on in July! The riots in Greece over the last year are largely blamed on the economic problems there.


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Thank you for this

Thank you for this interesting and well documented article.
Nevertheless I would like to make a comment.
Comparing countries debt relatively to their GDP is only possible if you consider the same debt perimeter.
Let me give you an example.
Talking about EU countries, debt is defined using Maastricht definition.
This means that the EU countries debt includes central governments debt, regional and local governments debt and cities debt. To make a comparison with the USA debt you should add to the Federal public debt (it seems you only take the public debt held by the public which is only $8.7 trillions- The number I found at the Tresury web site is $7.2 trillions today) the debt of the States and Local Government ($3 trillions rounded).

But this is not the end for a correct comparison. The Maastricht definition of the debt includes retirement debt (Social Security in the US) and all the debt relating to healthcare (Medicaid/Medicare). If I am correct, this is represented partially by what is called in the public debt the "Intragovernmental Holdings" which is today $4,341,162,599,800.68 (rounded to $4,3 trillions).

To be really on the same level of comparison the debt of the companies in which US government has now a large share (nationalization de facto) has to be considered. I do not have the figure but I guess the number is not ridiculous.

To summarize it seems that the correct figure to be considered as the US debt, in comparison with EU countries, is ... 7.2 + 3 + 4.3 + ? or at least $14.5 trillions.

Considering this minimum figure the debt to GDP ratio is now 100%


RE: definition of "debt"

Thank you for these thoughtful comments. Of course, you are right. To compare one country to another requires that the debt definitions be the same. For this reason I tried to get all the data from one source, in this case the CIA World Factbook. For the US states and cities, I went directly to their websites (usually the treasurer's office).

The number you are calculating for the USA is "national debt" which, as you point out, measures the total indebtedness of the nation. In fact, the US Government has committed to spend almost $13 trillion just in bailout and stimulus spending! If you add that to your calculation, you may come up with a debt/GDP ratio approaching 200%. I didn't add that information in for the other countries, so it doesn't appear in the USA number in this article, either.

My attempt here was to get at "public debt", i.e., debt that was issued in public capital markets. My reasoning is that this is most of the debt that would be covered by credit default swaps. (Remember, I selected these countries based on the fact that they have the most default protection contracts written naming them.) My point in showing the debt/GDP ratio, just like showing the share of world GDP, is to give some sense of scale to the numbers.

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