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May 8, 2012

Datagraphic - Debt: The Developed, Developing Dichotomy

Debt (external and public) has been cited as a central factor dragging global economic growth down between 2008 and 2012. Following the 2007/2008 global financial crisis a major imbalance in debt levels between developed and developing economies emerged. High debt levels in developed economies have stifled growth as consumer expenditure, investor confidence and employment have declined, while lower levels of debt in developing economies have supported stronger growth.

Debt Levels in Selected Countries

ScreenHunter_04 May. 08 15.56

Note: External and public debt figures for India and Brazil are equivalent.

  • Both public debt and external debt represent important statistics measuring the solvency of an economy. External debt is all debt, including government debt and private citizens' debt, which is owed to creditors outside of the country. The servicing on external debt tends to be higher than internal as the market tends to determine the interest rate paid on the debt. As such, high external debt tends to demonstrate a less sustainable debt path. Public debt is debt owed by a country's government; the cost of servicing this debt impacts the amount of money the government spends on other parts of the economy;
  • Between 1990 and 2007 low interest rates and cheap credit in the developed regions drove consumer spending, significantly increasing the levels of private debt in these economies. France, for example, a country with one of the highest levels of external debt in the world at 214% of GDP in 2011 increased its external debt level by an average of 22.9% a year in US$ terms between 2002 (first date available) and 2007;
  • As a result of the global financial crisis in 2007/2008 private sector debt was transferred to government balance sheets as governments in both developed and developing regions attempted to prop up the destabilised financial industry by bailing out the cash-strapped banks. However the impact on the already heavily indebted developed regions, especially Europe, has been much worse. High levels of public debt in Italy for example, at 120% of GDP in 2011, have led the government to enforce major austerity measures while Greece has required two bailouts from the EU/IMF to tackle its massive public debt to GDP ratio which stood at 163% in 2011;
  • Strong export markets and economic growth have helped many developing economies to reduce their levels of public debt in the aftermath of the financial crisis. Argentina for example has managed to further reduce its level of public debt as a percentage of GDP by 22.9 percentage points between 2007 and 2011. Low public debt reduces a government's debt servicing costs, as well as increasing the options for expanding spending if the economy goes through a slowdown in the future. Brazil for example, with public debt of 66.2% of GDP in 2011, was able to employ expansionary fiscal measures in 2011 by cutting taxes and increasing the minimum wage to combat a slowdown in growth. The 2011 slowdown in the eurozone, precipitated by high levels of external debt has not been met by similar government policy, as an average public debt level of 88.1% of GDP in 2011 constrained government intervention;
  • In general, the major developing and emerging economies are in much better fiscal positions. The lesser debt burden has allowed these countries to recover more rapidly from the global economic downturn in 2008/2009 and return to higher growth rates. The developed region's real GDP growth rate averaged 2.4% a year between 2009 and 2011, while the developing region's was 6.8% over the same period, as these countries have not been forced to reign in private or public spending. This trend is expected to continue as the developed world continues to pursue policies of austerity to reduce both public and private debt levels with real GDP average annual growth of 2.4% forecast from 2012-2016, compared to 6.1% in the developing region.



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