Friday, April 23, 2010

Industrial Countries Debt is Simply Unsustainable: Whey The World Shifts to Emerging Markets for Investments

The state of each country and global region's debt is hon on the table below, with projections for years 2010 and 2011. The report was compiled by the Bank of International Settlements with date from the IMF and OECD.

The current levels of debt explain why large investors are moving away from Western European bonds into emerging market bonds. The current level of debts are unsustainable and investors know that something will break sooner or later.

Please see the table below, and look at the columns on the right (general government debt):

(please click to enlarge)

There are several countries with total current or projected government debt above 100% of GDP:

  • Greece
  • Italy
  • Japan
  • United States
There are many more with projections very close to 100 %:
  • France
  • Germany
  • Ireland
  • Portugal
  • United Kingdom
If we look at the bottom 3 lines of the table we see that, in sharp contrast, the level of debt for emerging nations is much lower, around 40%:
  • The Big 4 in Latin America: Brazil, Chile, Argentina, Mexico
  • Asia: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand
  • Central Europe: Czech Republic, Hungary and Poland.
The overall level of debt is shown by the red line in the chart below:

Note also that debt as percentage of tax revenue, (our report from March) the situation is not much different. The worst is Japan, at 601.1%, followed by Mexico at 339.2%, Greece at 244.3%. The U.S. is 6th at 144.7%. Best among industrialized nations is Australia at -39%. Chile has an outstanding performance at -47%.

It is easy to see why investors would shift to emerging nations.

We track all global ETFs live as well as global currency ETFs. These ETFs provide an easy way for common investors to diversify into emerging nations and regions.

The conclusion is that many countries face the prospect of large and rising future costs due to not only interest rates rising (it is not a matter of if, but when they will rise) but also due to the ageing of their populations. The BIS says that current path pursued by fiscal authorities in a number of industrial countries is unsustainable. "Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability".

The Bank of International Settlements paper.

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