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Learning, Sharing, and Teaching => Investor Alley => Topic started by: kenmoremmm on June 07, 2020, 09:45:55 PM

Title: when does a country's debt to GDP matter?
Post by: kenmoremmm on June 07, 2020, 09:45:55 PM
https://worldpopulationreview.com/countries/debt-to-gdp-ratio-by-country/

i was listening to some podcasts and the takeaway was that once countries reach 90%, it signals the beginning of the end due to servicing costs and loss of trust in that country to pay back the debt. however, in today's world full of creative monetary policies, is this metric still true?

would you place much value in evaluating a country's overall health by reviewing the debt:GDP ratio?
Title: Re: when does a country's debt to GDP matter?
Post by: MustacheAndaHalf on June 07, 2020, 11:33:01 PM
Do you mean the countries shown on this list, ranked by debt to GDP percentage?
https://worldpopulationreview.com/countries/countries-by-national-debt/

CountryNational Debt to GDP RatioPopulation
Japan237.54%126,476,461
Venezuela214.45%28,435,940
Sudan177.87%
Greece174.15%10,423,054
Lebanon157.81%6,825,445
Italy133.43%60,461,826
Eritrea127.34%3,546,421
Cape Verde125.29%555,987
Mozambique124.46%31,255,435
Portugal119.46%10,196,709
Barbados117.27%287,375
Singapore109.37%5,850,342
United States106.70%331,002,651
Bhutan103.85%771,608
Cyprus101.04%1,207,359
Bahrain100.19%1,701,575
Title: Re: when does a country's debt to GDP matter?
Post by: hodedofome on June 08, 2020, 06:31:50 AM
When it starts to matter for Japan, then we’ll know when it may matter for us. Until then, carry on.
Title: Re: when does a country's debt to GDP matter?
Post by: vand on June 08, 2020, 07:40:10 AM
Like any loan, it's not just about the amount borrowed, but also rate of interest on that debt that creditors take into account in determining if they have confidence in that borrower's solvency.

Right now with global rates so low, the cost of interest on the debt actually sits pretty low by historic terms, despite the high amount of borrowing. Low rates is what is keeping it all glued together at the moment.

But if rates rise for some reason, for example if inflation gets out of hand, then I expect we'll enter a sovereign debt crisis where people suddenly decide that lending money to a bankrupt entity for less than the rate of nominal inflation maybe isn't such a good idea... and then people don't want bonds, yields spike, and we have a SHTF scenario.

Given that Japan has been experiencing deflation, there is no pressure on yields to stay positive, hence why they have the particular luxury of investors willing to accept sod all return on their debt, but that won't be the case in an inflationary scenario.

Title: Re: when does a country's debt to GDP matter?
Post by: ChpBstrd on June 08, 2020, 10:06:35 AM
Quote from: hodedofome on June 08, 2020, 06:31:50 AM
When it starts to matter for Japan, then we’ll know when it may matter for us. Until then, carry on.

Japan has experienced nearly 3 decades of near-deflation and economic stagnation since their QE started. Stock market returns and interest rates have been almost flat for a generation, meaning that to FIRE one would have to essentially save up enough cash to spend down a portfolio for the rest of one's life (or invest elsewhere to the extent possible). Things are so bad that people are unable to get married, have kids, or form households. The Japanese work some of the longest hours in the world just to stay financially afloat. An oligopoly of politically-connected corporations and banks are essentially pets of the government and with their ability to borrow at near-zero rates they lock out the economy from innovative disruption. Demographic graying (a consequence of the requirement to work long hours to stay afloat in a high-cost, low-interest rate economy) means Japan's problems will only intensify in the next 20 years. If the interest rates required to roll over their debts ever increase, they will be ruined.

If it seems like the US has been moving in these directions for the last 20 years, it's because we have.
Title: Re: when does a country's debt to GDP matter?
Post by: marty998 on June 09, 2020, 04:48:35 AM
Just throwing it out there for discussion.... everyone quotes the Nikkei as if it hasn't gone anywhere for 30 years, but that also ignores dividends. The accumulation index probably looks a little different.

Secondly, if the population is falling, does it matter so much if the stockmarket falls at a slower rate? Is there any sort of metric for stockmarket value per person out there... what you might consider as wealth per person or per household?

I get that it's still intuitively bad (perhaps). But the concept of negative interest rates being in play and the world not collapsing leads me to think that negative "other things" can still work over long periods of time.
Title: Re: when does a country's debt to GDP matter?
Post by: celerystalks on June 09, 2020, 05:12:47 AM
It depends whether a countries debt is denominated in their own controlled currency or someone else's. This determines whether citizens will suffer through austerity or whether creditors will suffer through inflation when the bill is due.

For instance, the U.S. can simply print whatever money is needed to service the future dollar based obligations.

Greece OTOH did not control the Euro and in 2011-12 they were forced to engage in severe austerity measures when their debt became unsustainable.
Title: Re: when does a country's debt to GDP matter?
Post by: stylesjl on June 09, 2020, 05:33:14 AM
Quote from: marty998 on June 09, 2020, 04:48:35 AM
Just throwing it out there for discussion.... everyone quotes the Nikkei as if it hasn't gone anywhere for 30 years, but that also ignores dividends. The accumulation index probably looks a little different.
Interestingly enough there is a calculator which shows you just how much of an annual return you would have gotten for the Nikkei.

https://dqydj.com/nikkei-return-calculator-dividend-reinvestment/

Assuming you invested right after the bubble burst (January 1991) to January 2020 the annual return is around 1% with dividends and -0.2% without. If you invested at the height of the bubble though (December 1989) its -0.7% even with dividends.
Title: Re: when does a country's debt to GDP matter?
Post by: BicycleB on June 09, 2020, 02:46:56 PM
^Do those returns adjust for inflation?

Using that calculator, if you start in January 1990 to January 2020, denominating in US$ while checking the box for inflation adjustment, it says annual return of -2.852%, with annual return including dividend reinvestment producing -1.579%. Cumulatively, the calculator states an inflation-adjusted return of -58%; with dividend reinvestment, -37.9%.

That's pretty bad even before considering the risk of a meltdown in that event that interest rates rise. Which I think is a risk in the long term. Kind of like riding on a horse in fog, knowing there's a chance of stepping off a cliff sometime.
Title: Re: when does a country's debt to GDP matter?
Post by: MustacheAndaHalf on June 10, 2020, 12:59:53 AM
I started with Japan ETFs, and ignored those with no 5 year performance history.
https://etfdb.com/etfs/country/japan/

When I put them in order of performance, all of the "hedged" ETFs wind up at the bottom.  Note etfdb lists raw total performance - not annualized.  So every performance number is directly comparable.  Here's the hedged Japan ETFs, with 5 yr minus 3 month (13 week) performance:

DXJS (sm cap hedged)  17.18% - 17.98% = -0.80%
HEWJ (hedged)  7.72% - 14.70% = -6.98%
DXJ (hedged)  -5.83% - 14.43% = -20.26%

Now the ETFs which did not hedge (against currencies):

JPMV (low volatility) 26.58% - 6.97% = +19.61%
SCJ (sm cap) 33.76% - 15.11% = +18.65%
DFJ (sm cap dividend) 31.49% - 15.02% = +16.47%
EWJ () 21.15% - 12.04% = +9.11%
Title: Re: when does a country's debt to GDP matter?
Post by: catprog on June 10, 2020, 05:08:10 AM
Another part of the equation is who they owe the dept too and how much assets they have.

https://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Mauritius owes 1546% of it GDP to external people.
Malta owes 879% of it's GDP

But reading about them they both seem to have a large amount of people who have their money in banks thier.
Title: Re: when does a country's debt to GDP matter?
Post by: talltexan on June 10, 2020, 06:15:26 AM
Indeed there are different kinds of countries on that list.

Venezuela's economy has shrunk by something like a third over ten years, so its very high debt/GDP ratio comes from the denominator getting smaller. I'm glad someone mentioned the example of Mauritius with their foreign tax haven status. Sometimes countries like that--I have in mind Ireland or Cyprus during the last downturn--can get into trouble. The US is different from all other large economies because of the extent to which the US Dollar is the foundation of the global financial system.

The 90% threshold came from a Reinhart/Rogoff book called "This Time is Different", but that specific threshold has not held up in other study, and ultimately it was found to have originated from a math error in their own work.

None of this is to argue that a government debt can grow without constraints. Inflation and interest rates are the sign as to whether the government is getting near the limits of what the market will lend it.
Title: Re: when does a country's debt to GDP matter?
Post by: ChpBstrd on June 10, 2020, 09:28:00 AM
Quote from: talltexan on June 10, 2020, 06:15:26 AM

None of this is to argue that a government debt can grow without constraints. Inflation and interest rates are the sign as to whether the government is getting near the limits of what the market will lend it.

It doesn’t seem to be a linear process though. Just a few years ago investors were happily lapping up 100(!) year bonds from Argentina and today Argentina is practically locked out of the lending markets. On the flip side, look at Greece which followed the opposite path in the same timeframe! Neither country’s debt load seems to have changed in such a material way to explain these market moves.
Title: Re: when does a country's debt to GDP matter?
Post by: vand on June 10, 2020, 12:28:44 PM
Quote from: talltexan on June 10, 2020, 06:15:26 AM
Indeed there are different kinds of countries on that list.

Venezuela's economy has shrunk by something like a third over ten years, so its very high debt/GDP ratio comes from the denominator getting smaller. I'm glad someone mentioned the example of Mauritius with their foreign tax haven status. Sometimes countries like that--I have in mind Ireland or Cyprus during the last downturn--can get into trouble. The US is different from all other large economies because of the extent to which the US Dollar is the foundation of the global financial system.

The 90% threshold came from a Reinhart/Rogoff book called "This Time is Different", but that specific threshold has not held up in other study, and ultimately it was found to have originated from a math error in their own work.

None of this is to argue that a government debt can grow without constraints. Inflation and interest rates are the sign as to whether the government is getting near the limits of what the market will lend it.

I would argue that in Venezula's case the GDP/Debt is nothing like that quoted 214%, whereever it is coming from. The Venezuela govt stopped publishing any accurate economic data a long time ago and now just publishes pie in the sky inflation figures and sets an official exchange rate that nobody actually uses, because the true black market exchange rate is like a zillion times worse.

Unfortunately this is the sort of thing that happens when countries become insolvent. The USSR seemingly had great macros right up until it all fell apart!