Government debt ratio

Development of the national debt ratio of European countries - national debt as% of GDP from 1995 to 2017. Data from Eurostat .

Debt ratio (or in short: debt ratio ) is in the finance an economic indicator , the relationship between the debt and the nominal gross domestic product of a certain state is expressed.

General

It is a debt metric that is intended to show the sustainability of national debt. It compares the absolute amount of a country's debt with its economic output. National debts are the liabilities of a state, its regional authorities and government agencies. In terms of government debt, a distinction is made between domestic debt (the debt of a country to domestic creditors; internal debt ) and foreign debt (debt to foreign creditors; external debt ). Internal and external debt together make up the national debt. These are compared with the nominal gross domestic product (GDP). The counterpart of the national debt ratio for companies is the level of debt .

EU convergence criteria

In the EU, the government debt ratio is contractually set. Art. 126 (2) no. B) of the TFEU ( Maastricht criteria) defines the national debt ratio as “the ratio of public debt to gross domestic product”. The "public debt" is the sum of all liabilities of state local authorities ( federal government , federal states , municipalities ) and state agencies. This national debt may not amount to more than 60% of the gross domestic product; at the same time, the annual budget deficit (= new debt ) must not exceed 3% of gross domestic product ( EU convergence criteria ). That would mean that three fifths of the economic output of a whole year would have to be paid to the creditors of the state in order to pay off the entire national debt in one year. Of course, currency reserves or new indebtedness can also be used as secondary sources for debt repayment for debt servicing, but these positions are not intended for this purpose.

Key figures

The national debt ratio is often viewed together with the debt service coverage ratio . Both key figures are used by banks and rating agencies to determine the rating of states.

Government debt ratio

The national debt ratio can be determined as follows:

${\displaystyle {\text{Staatsschuldenquote}}={\frac {\text{interne + externe öffentliche Verschuldung}}{\text{Bruttoinlandsprodukt}}}}$

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 ), GDP declines, while government spending increases (due to increasing unemployment and social benefits ). This means that the national debt ratio will initially increase due to the lower GDP alone, but then also due to the increase in national debt as a result of the budget deficit.

Is therefore the government debt ratio higher than 60% of GDP, the public debt inappropriately high and cause economic risks - for - for excessive government debt ratios, indebtedness of states to rescue from the International Monetary Fund , World Bank and Paris Club / London Club or bankruptcy can lead .

However, the traditional indicator of the national debt ratio does not yet take into account the implicit debt, which is discussed as shadow debt . The European Central Bank (ECB) is now warning of the consequences of shadow debt in the euro countries. The guarantees for other EU member states and its own banks could increase Germany's debts by 11.2% to a national debt ratio of around 90% of gross domestic product (GDP).

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 . 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.

${\displaystyle {\text{Schuldendienstdeckungsgrad}}={\frac {\text{Zinsaufwendungen + Tilgungszahlungen}}{\text{Bruttoinlandsprodukt}}}}$

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.

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 ).

Debt sustainability

The public debt is considered sustainable if the accumulated national debt can be serviced at any time. To do this, governments must be both solvent and liquid . Debt sustainability means that a state can service its debts (including the implicit ones from shadow debts ) now and in the future, i.e. avoiding national bankruptcy . In the past, debt sustainability was assessed using static indicators such as the debt ratio or the debt service ratio. However, these measures only reflect the past and say little about the future solvency of the country under consideration.

This is why international organizations such as the IMF, World Bank and OECD have long used dynamic, forward-looking indicators to assess debt sustainability. These analyzes focus on three variables, namely the current level of debt, the interest rate to be applied and the expected future primary balances . Following an accounting identity, the present value of the expected primary surpluses must exceed the current level of debt if the public debt is to be sustainable. If this is not the case, adjustment measures such as revenue increases or spending cuts are necessary in order to avert national bankruptcy.

When assessing debt sustainability, it must be taken into account to what extent a state has short-term access to the financial markets to refinance maturing debts . A country that has increasing difficulty in obtaining short-term refinancing in the financial markets could jeopardize the sustainability of its debt in the medium term, as higher bond yields lead to higher debt servicing costs over time. In addition, public debt can only be considered sustainable if the fiscal measures required to ensure sustainable debt levels are both politically and economically realistic and feasible.

Limit values

Limit values ​​are the upper limit that one of the determined debt ratios may only temporarily and only slightly exceed. The stability criteria of Art. 126 TFEU can be used as limit values, but also those determined by the IMF and World Bank . States that exceed the IMF and World Bank limits can count on help.

The limit values ​​for the individual indicators must exceed the following thresholds at the IMF and World Bank:

${\displaystyle {\frac {\text{EDT}}{\text{GNI}}}>40\,\%}$

${\displaystyle {\frac {\text{EDT}}{\text{XGS}}}>150\,\%}$

${\displaystyle {\frac {\text{TDS}}{\text{XGS}}}>15\,\%}$

Are there

${\displaystyle {\text{EDT}}}$: External Debts Total ( German  total foreign debt )

${\displaystyle {\text{BIP}}}$: Gross domestic product

${\displaystyle {\text{GNI}}}$: General National Income ( German  state revenue )

${\displaystyle {\text{XGS}}}$: Export of Goods and Services ( German  export revenues )

${\displaystyle {\text{TDS}}}$: Total Debt Service ( German  interest and repayment on loans )

${\displaystyle {\text{INT}}}$: Interests ( German  debt interest )

The limit values indicated are for HIPC - ( English Heavily Indebted Poor Countries ) and MDRI - ( English Multilateral Debt Relief Initiative ) designed States. IMF and World Bank apply these limit values ​​as part of the debt relief initiatives (40% debt / GDP, 150% debt / export income, 15% debt service / export income). The limit values ​​are not of a generally valid nature, but can be set too high in individual cases.

The World Bank uses four thresholds to determine a country's level of debt: EDT / BIP (30%), EDT / XGS (165%), TDS / XGS (18%) and INT / XGS (12%). A state was therefore considered to be heavily indebted if three of the four limit values ​​were exceeded. At the end of 2001, Argentina's national debt reached 64.1% of GDP (limit value: 60%), and foreign debt, at 383% of export earnings, more than doubled the limit value (limit value: 150%). These are metrics that were alarming from a debt metrics perspective. In addition, the strong debt in foreign currency had a negative effect due to the devaluation effects ( Original Sin ).

However, the above key figures represent global limit values ​​and must be evaluated individually. There are no generally valid and fixed limit values ​​that represent a critical mark in individual cases and would signal a danger point if exceeded. If at least two of these limit values ​​are exceeded not only temporarily and not only slightly, this can be interpreted as an indicator of an impending national bankruptcy.

Others

The regular publications of supranational organizations show how significant the national debt ratio is - especially with regard to the Greek national debt crisis . The IMF publishes historical and forecast national debt ratios by country every year. For the countries of the European Union , the European statistical authority Eurostat also publishes annual historical quotas and quarterly press releases on the current development of the national debt ratios of the member states.

See also

• List of countries by national debt ratio
• List of European countries by national debt ratio
• National debt ratio in Germany

Individual evidence

1. ↑ Franz Schuster, Europa im Wandel , 2013, p. 89.
2. ^ Norbert Kloten / Peter Bofinger / Karl-Heinz Ketterer, Newer Developments in Monetary Theory and Monetary Policy , 1996, p. 92.
3. ↑ Heinz-J. Bontrup , wages and profits. Economics and business basics , 2nd edition, 2008.
4. ↑ Urs Egger, Agricultural Strategies in Various Economic Systems , 1989, p. 124.
5. ↑ ^{a b} Monthly Report of the ECB of April 2012, p. 68.
6. ↑ Publication of the ECB on debt sustainability
7. ↑ James Sperling / Emil Joseph, Recasting the European Order: Security Architectures and Economic Cooperation , 1997, p. 174
8. ↑ Michael Waibel, Bankrupt States , June 9, 2009, p. 2
9. ↑ Thomas Martin Klein, External Debt Management , 1994, p. 128 f.
10. ↑ International Monetary Fund: All countries Government finance> General government gross debt (Percent of GDP)
11. ↑ Eurostat: Government gross debt - percentage of GDP and millions of euros
12. ↑ Third quarter of 2014 compared to the second quarter of 2014 - government debt in the euro area fell to 92.1% of GDP (January 22, 2015)