Tuesday, October 18, 2011

Why Japanese Debt is better than Greek Debt ... and Australia Compared

A lot of guff is written about debt. Part of the problem stems from a failure to distinguish between types of debt - between public and private debt, between foreign and domestic debt and between gross and net debt. I've written about these issues before here and here.

The graph from The Economist shows clearly why the public debt situation in Japan is less worrying than Greece's, despite Greece having a considerably lower level of gross debt.

Gross debt is the preferred focus of news media because it sounds more extreme.

What matters is net debt and how much debt is owed to foreigners.

The problem for Greece (and Italy, Ireland, Portugal and Spain ... perhaps even France) is that they are stuck with the Euro, which means they can't devalue or inflate their debt levels down. This makes bondholders worried that the eventual outcome will be the departure of some countries from the Euro or default. The two options may of course be related.

Imagine the scenario of Greece going back to the drachma or Spain to the peseta. Both currencies would suffer a large devaluation against the Euro and the dollar - the currencies in which a large part of their debt is denominated in. So while they would get a competitive boost from the devaluation, their debt would expand in local currency terms.

There are no easy options for Europe at the moment.

Interesting to note that a majority of US debt is held domestically. Despite the US debt to China being such a big issue and an indicator of US weakness in relation to China, US debt is more of a problem for China than the US.

Eventually Japan too will have to face up to the issue of just how much debt can you get yourself into before it's unsustainable.

Australia's public debt situation is remarkable by comparison as the following graphs from The Final Budget Outcome for 2010-11 released recently.  Neverthless, as I recently argued in "Structural Shenanigans in the Australian Economy" for Australian Policy Online, Australia's private foreign debt and household debt is still a major issue for the economy.

No comments:

Post a Comment

Please be civil ...