The public debt of rich countries is forecast to rise to 133% of GDP (gross domestic product -- the value of national output) in 2020 compared with 102% in 2010 and in the case of Ireland, the debt will increase to 118% compared with 28% in 2007.
On Wednesday, Germany's biggest bank, Deutsche Bank, published a paper, Public debt in 2020: A sustainability analysis for DM and EM economies, which analyses public debt sustainability in both developed and emerging economies. The country sample consists of 38 countries, 21 emerging markets (EMs) and 17 developed markets (DMs), together accounting for roughly 85% of world GDP.
The authors of the paper - - Sebastian Becker, Gunter Deuber and Sandra Stankiewicz - - say that nine DMs face substantial consolidation needs - - Ireland, Germany, the UK, the US, France, Portugal, Greece, Italy and Japan. They account for around 85% of the DM sample’s total GDP. However, the EMs that are either subject to tangible consolidation needs - - the Czech Republic, Hungary, Romania and Poland - - or where past efforts to lower high public debt have to continue e.g Turkey, Brazil, India, account for only 29.8% of the EM sample’s total GDP. The statistics of the sample debt distributions based on 2010 public-debt-to-GDP ratios speak the same language.
John Lipsky, First Deputy Managing Director at the International Monetary Fund, said at the China Development Forum in Beijing last weekend that while the recovery is welcome, the crisis is also leaving deep scars in fiscal balances, particularly in the advanced economies. "We project that gross general government debt in the advanced economies will rise from an average of about 75% of GDP at end-2007 to about 110% of GDP at end- 2014, even assuming that the temporary, crisis-related stimulus measures are withdrawn in the next few years," he said. "Indeed, we expect that all G7 countries except Canada and Germany will have debt-to-GDP ratios close to or exceeding 100% by 2014. Already in 2010, the average debt-to-GDP ratio in advanced economies is projected to reach the level prevailing in 1950, in the aftermath of World War II. Moreover, this surge in government debt is occurring at a time when pressure from rising health and pension spending is building up," he added.
In a paper presented last January at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, looked at the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: countries with a gross public debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For rich countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.
The authors of the celebrated history of financial crises, This Time It’s Different: Eight centuries of financial folly; conceit and money, said the relationship between government debt burdens and growth is even stronger for emerging-market economies. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens.
The Deutsche Bank economists say in their paper that on a GDP-weighted basis public indebtedness in DMs will continue to rise substantially to 133% of GDP on average by 2020 (from 102% in 2010), according to baseline projections. In EMs, the debt-to-GDP ratio will fall to 35%, from around 46% in 2010 (see Chart 14 on the report). Looking at specific countries in the DM world, Japan, Greece, the US, Portugal, Italy, the UK, Ireland and France will probably have debt-to-GDP ratios of over 100% in 2020. Noticeably, Italy is the only country in this group whose debt-to-GDP ratio looks set to remain more or less at the same level as today. In Australia, Denmark, Sweden and Belgium, debt-to-GDP ratios are forecast to decline (see Chart 12).
In EMs, 16 out of 21 countries will probably see public debt decline over the period 2011-20 (see Chart 13). This indicates that most EM countries will not be forced to cut spending and/or hike taxes significantly. Only in five countries (Romania, the Czech Republic, Turkey, Poland and Hungary) will fiscal adjustment be necessary in order to avoid increases in the public debt burden between 2010 and 2020.
For 2010-14 the DB economists take the IMF’s real GDP growth forecasts (World Economic Outlook Database, October 2009). For 2015-20 a country’s real GDP is assumed to grow at the IMF’s 2014 forecast rate. The only exceptions are China, Mexico and Turkey where they expect somewhat lower or higher growth rates than the IMF. The medium-term real growth assumptions are in line with past averages (2000-09 for DMs, 2005-09 for EMs) (see Chart 8).
The average Irish growth rate in the period 2010-2020 is assumed to be 2%.
Ireland's fortunes are very much dependent on the DM economies and there are no significant direct linkages with EM economies.
Debt projections for single countries can be found in Table 1 in the Appendix.
Countries such as Ireland and Greece have to fund most of their debt externally unlike the big economies.
Japan funds most of its debt internally which means that it benefits from the very low domestic interest rates. It currently has large pension fund surpluses which reduce its debt ratio to about 110%.
According to an IMF paper in January, during the 1990s the 10-year Japanese Government Bond (JGB) yields declined steadily from 7% to below 2%, while net public rose from 20% of GDP to 60% of GDP. Since 2000, net public debt has further climbed to 90% of GDP, while long term yields have remained fairly stable at below 2%.
Germany's current 10-year bund rate of 3.06% compares with Ireland's equivalent of 4.48% and Greece's 6.33%.