Debt ratio

The debt ratio is a series of business indicators that form indicators of the sustainability of debt .

General

Creditors and other groups have an interest in being able to assess their credit risk with the debtor . This can be done using key business figures that have been specially developed to determine debt sustainability. In order to determine these key figures, the debtor must create transparency in his accounting system through the publication of annual financial statements or the state budget .

Debt ratios for national debt

Due to various financial state crises , in particular the debt crisis in Greece , debt ratios for national debt have moved to the fore of the public discussion.

Government debt ratio

The national debt ratio is one of the most important economic indicators and is only meaningful in connection with the debt service coverage ratio. Both key figures are used by banks and rating agencies to determine the rating of states . The national debt ratio can be determined as follows:

{\ displaystyle {\ mbox {National debt ratio}} = {\ frac {\ mbox {internal + external public debt}} {\ mbox {gross domestic product}}}}

The key figure indicates the extent to which the level of government debt is still sustainable compared to the economic performance of a country. In the case of a balanced state budget , the state can pay its debt servicing ( interest and repayments ) on national debts from budget revenues and thus contribute to reducing its debts. However, if there is a budget deficit, it has to take on new debt to compensate for the deficit and thus contributes to the increase in national debt. In an economic recession or even during financial crises (such as the financial crisis from 2007 ), gross domestic product declines, while government spending increases (due to increasing unemployment and social benefits ). This means that the national debt ratio will initially increase solely due to the lower gross domestic product, but then also due to rising national debt as a result of the budget deficit.

In the case of high or dynamic economic output, a state can more easily afford a higher debt burden than states that tend to show a disproportionately low growth in gross domestic product. If the national debt ratio is higher than 60% of GDP (see Maastricht criteria ), the national debt is inappropriately high and causes economic risks that - with excessive national debt ratios - lead to excessive indebtedness of states, to rescue measures by the International Monetary Fund , World Bank and Paris Club / London Club or lead to national bankruptcy .

Debt service coverage ratio

In the case of states and their local authorities as debtors , the debt service coverage ratio indicates the extent to which the interest and repayments to be paid on loans are covered by the state through gross domestic product or export earnings . It can be interpreted as a measure of a country's resilience and as an indicator of its vulnerability to changes in the terms of trade . The budgetary debt service relates to the expenditure of the general public budget, while the macroeconomic debt service results from the comparison of the interest expenses and repayments with the gross domestic product.

{\ displaystyle {\ mbox {Debt service coverage}} = {\ frac {\ mbox {Interest expenses + repayments}} {\ mbox {Gross Domestic Product}}}}

Debt servicing can be subject to greater changes if the volume of short-term debt is relatively high and the mostly variable debt interest rates are subject to large market fluctuations. The situation is critical for a state and its local authorities if the interest and repayment service exceeds 20% to 25% of the permanently achievable export revenues (state) or total income (local authorities) or reaches more than 20% of total expenditure. If the critical limits are exceeded permanently, states can get caught in a state crisis. One-sided export dependencies, structural export weaknesses or low competitiveness limit exportability and tend to increase the debt service ratio. If there is little export dynamism, debt servicing has a disadvantageous effect because more and more export proceeds have to be used to pay interest and repayments.

A negative development in the debt service coverage ratio can usually only be countered by states and their regional authorities with strict budgetary discipline in the area of expenditure ( austerity policy ).

Interest rate

The interest burden ratio or the interest coverage ratio indicates the ratio of interest payments (only interest, no repayment) to a country's export revenues. It is assumed here that the country overdue debt with new debt repaid can and therefore the export revenue be used only to finance the interest.

{\ displaystyle {\ mbox {Interest burden quota}} = {\ frac {\ mbox {Interest expenses}} {\ mbox {Export revenues}}}}

The interest burden ratio can be subject to greater changes, since the volume of short-term debts can change quickly and the mostly variable debt interest rates can also be subject to large market fluctuations. The situation is critical if the interest and repayment service exceeds 20% to 25% of the permanently achievable export revenues. The budgetary interest burden ratio relates to the total public budget expenditure, while the macroeconomic interest burden ratio results from the comparison of the interest expenses with the gross domestic product . Export-oriented countries can afford higher interest payments than countries that have a cyclical or one-sidedly structured export economy because of their export dynamics.

Key figures at the municipal level

As part of the municipal annual financial statement analysis, a large number of typical municipality key figures are determined, with the help of which the economic situation of municipalities can be determined. The municipal debt service coverage ratio indicates the extent to which the interest and repayments to be raised for debts can be paid by the municipality from its total income.

{\ displaystyle {\ text {Debt service coverage}} = {\ frac {\ text {Interest expense + repayment expenses}} {\ text {Total income}}}}

Corporate debt ratios

The degree of indebtedness indicates the ratio between the balance sheet debt and the equity of a company. The higher the level of debt, the more dependent a company becomes on external creditors . A high level of indebtedness increases the lender's risk because, in case of doubt, their liability for the assets tied up in equity will not be sufficient to repay the debt in full if the debtor becomes insolvent . In the company itself, a high level of indebtedness increases the interest paid on debts .

The interest expense, in turn, is an expense on the income statement and an expense is a company's liquidity . Companies with high equity capital have to bear lower interest expenses than comparable companies with weak equity capital. Increases in interest rates therefore have a significantly more negative effect on companies with weak equity than on companies with strong equity ( leverage effect ). This also applies to the increase in debt. The KfW Group has determined that the interest coverage ratio of German companies is relatively high compared to the European competition, in which the relative shortage of capital is expressed. But the debtor himself also consults the interest burden ratio, along with other key figures, when he has to make investment decisions. According to this, it has been empirically proven that companies with a high interest burden rate also have lower investment rates because debt servicing has a strong influence on investment activity.

{\ displaystyle {\ text {Interest coverage}} = {\ frac {\ text {Cash flow (or EBIT)}} {\ text {Interest expenses}}}}

The cash flow reflects the income generated from the annual sales process , which can also be used to service debts. In addition to the interest expense, repayments must also be made from the cash flow. To account for this, the sum of all be payable and the interest and sinking fund ( debt service ) each set in relation to cash flow to debt sustainability to identify a company. The debt situation for companies - depending on the sector - is critical when the liabilities exceed 400% of the cash flow or the debt service exceeds 50% of the cash flow. If these limits are not only exceeded temporarily, a company finds itself in a corporate crisis .

Household debt ratios

The IMF recommends that private households to determine the debt service ratio in relation to the since 2004 income . The relevant reference value is the available annual net income, because the taxes and duties included in the gross income are not available to the private household. Fixed costs ( rent and ancillary costs , insurance premiums , leasing fees , subscription costs ), energy costs and other living costs are to be deducted from the available net income :

   verfügbares Netto-Einkommen
   - Miete und Nebenkosten
   - Versicherungsprämien
   - Leasinggebühren
   - Energiekosten
   - übrige Lebenshaltungskosten
   = Netto-Einkommen vor Schuldendienst
   - Schuldendienst
   = Netto-Einkommen (frei verfügbar)

The net income can be found in the following formula as a denominator :

{\ displaystyle {\ mbox {Debt service coverage}} = {\ frac {\ mbox {Interest expense + repayment}} {\ mbox {Net income before debt service}}}}

The debt service coverage ratio worsens when new loans are taken out or the interest rate increases (with variable interest rates ) or the net income decreases (e.g. due to unemployment ).

According to the OECD , the debt service ratio in some countries was less than 25% of household income, while in the USA the debt service ratio was only 10% in 2013. These quotas largely prevent financing risks that can also arise on the expenditure side from an increase in the price level for the cost of living. If the debt service ratio exceeds 40%, there are considerable financing risks for the private household, which can lead to insolvency , over-indebtedness , loan termination and ultimately personal insolvency . A private debtors is considered vulnerable when the debt service of all loans more than 40% of their monthly gross income must expend. Converted to the net income in the USA (Germany; see tax rate ), the rate is around 29% (26%).

Around 45% of German private households were in debt in 2014, around 22% of all German households own real estate financing . Around 60% of households used less than 20% of their net income for interest and repayments, less than 10% of households used more than 50% of their income, the average rate being 20%.

Effects

Debt ratios can be part of bond terms or loan agreements under the covenants . In doing so, the debtor undertakes to his creditors not to exceed a certain contractually stipulated upper limit for a certain debt ratio. If the upper limit is exceeded, there is a breach of contract ( covenant breach ), which initially usually results in a remedy / grace period , which is intended to enable the borrower to subsequently meet the specified key figures. However, if this still does not succeed , a higher credit margin or even an extraordinary termination right of the creditor will be triggered.

literature

Rüdiger C. Sura: Stability Conditions for Debt Processes in Selected Emerging Markets; Edition 23 of World Economic Studies from the Institute for European Economic Policy at the University of Hamburg, 1991, ISBN 3525121180 , page 55 ff., Online

Individual evidence

^ Norbert Kloten / Peter Bofinger / Karl-Heinz Ketterer, Newer Developments in Monetary Theory and Monetary Policy , 1996, p. 92

↑ Heinz-J. Bontrup , wages and profits. Economics and business basics , 2nd edition, 2008

↑ Urs Egger, Agricultural Strategies in Various Economic Systems , 1989, p. 124