At first glance, what could possibly unite countries such as the United States, home to popular brands such as Coca-Cola, Apple, Nike and Starbucks, Japan, famous for the fastest trains in the world, Venezuela, known for its vast oil reserves, and Cuba, which has been experiencing a total blackout for several weeks now, leaving about 10 million people without electricity?
It turns out that these countries have in common a high level of public debt relative to gross domestic product. It seems that Ukraine will soon join this circle of countries with high external debt, as this indicator is already equal to the volume of goods and services produced in a year. However, one should not think that high public debt is definitely a bad symptom; it is, first and foremost, an important macroeconomic tool of the state. However, it does resemble a pyramid scheme at the state level, where new debts are constantly being incurred to pay off old ones.
How and why public debt arises
Public debt is one of the most popular economic topics in the media. The growth of public debt has become a global trend, affecting both highly developed countries with strong economies and countries with weak economies. It is important to understand that the ratio of public debt to GDP is usually considered, i.e. it is a relative indicator. It is a relative economic indicator that compares public debt to the size of the country’s economy and plays a key role in determining the economic stability and debt repayment capacity of a country.
To reduce the debt-to-GDP ratio, it is not necessary to reduce the amount of debt; it is enough to reduce the production of goods and services, and vice versa. It is also important to take into account debt service costs, as budget revenues depend on the economic state of the country.
Which country leads the world in terms of public debt
Lebanon has one of the highest levels of public debt, both in absolute terms and as a percentage of GDP. This creates significant financial and economic challenges for the country. While the country’s debt is around $100 billion and has hardly changed, the debt-to-GDP ratio has risen from 120% to almost 350%. This shows how relative indicators can change without changes in absolute debt figures. Lebanon’s economy has been destroyed and has been stagnating for three years. There are few people willing to lend money to a bankrupt country. The main injections into the economy come from the IMF under various development programmes, but the debt is growing as the economy shrinks.
For comparison, despite the military risks and costs, the Ukrainian economy grew last year. And in Lebanon, due to the failed political system, there is not enough money even for fuel for power plants, so citizens buy generators and sell electricity to their neighbours.
Why Japan and China are leading the way among the countries with the largest public debt
Both the relative and absolute figures of developed countries are shocking. Paradoxically, Japan is one of the world’s largest economies, with a public debt of more than USD 10 trillion.
The situation in Japan is threatening. First, the country has lost its position as the world’s reserve currency. Secondly, the steady ageing of the population and the stagnation that followed the ‘lost decade’ are contributing to the increase in Japan’s public debt. A significant increase in debt was caused by prolonged government bailouts and stimulus measures after the 1992 stock market crash. As a result, debt grew while GDP did not.
Interestingly, part of the public debt is placed in bonds with negative yields. Deflation in Japan, i.e. a decline in prices, meant that demand for goods was less than their supply. This forced manufacturers to lower prices, cut costs and lay off workers. Despite this, investors bought bonds with negative yields because they were a safe investment.
The explanation for this phenomenon is that the Japanese stock market has long suffered from fraud, with large shareholders underreporting dividend yields and manipulating financial statements. This made government bonds – even those with negative yields – more attractive because of their stability. The government issued more bonds to stimulate spending, but an ageing population reduced consumer demand. Japan also lost its position in the global market due to competition with China.
China, in turn, also has one of the largest public debts in the world. So why do other countries still buy its bonds, despite the riskiness of such investments, since China could sell these bonds, which would increase their number and reduce their value?
China does not sell its bonds because they are an important instrument for financing economic development and stability. Selling the bonds could increase the cost of repaying them, which could affect the country’s economy. In addition, keeping a large number of bonds allows China to control its financial resources and ensure long-term financial stability.
At home, walls help, or why America is not afraid of public debt
At the same time, the United States, with the world’s largest GDP, ranks 12th in terms of debt-to-GDP ratio due to high military spending, tax cuts and insufficient funding for programmes.
Thus, the US owes $35 trillion, which is more than its projected GDP in 2024. Interestingly, the US has electronic boards in public places that show the current amount of debt. In addition, the topic of public debt is constantly discussed in the US media. Despite this, the US continues to grow economically and enter new markets, as the debt does not have to be repaid immediately.
In the United States, where the stock market is well developed, government bonds are one of the most popular and reliable investment instruments, as they are short-term loans with maturities of 1 to 10 years. Moreover, 28 of the $35 trillion of government debt is held by Americans themselves. Government bonds are also popular in many countries as a conservative investment instrument and are part of the foreign exchange reserves and investment portfolios of US pension funds.
The fact that US government debt is denominated in US dollars reduces the risk of default. In the event of a money supply shortage, for example during force majeure events such as COVID-19, the US can simply issue additional debt. Although this leads to an increase in inflation, it guarantees the fulfilment of obligations. This makes the US government debt special.
The US dollar is the world’s reserve currency, in which most trade transactions are conducted.
And the answer to the question of why people continue to invest in the US economy, even if the US can increase the money supply, is obvious: The US is one of the most developed countries with strong institutions.
According to the US Treasury Department and the Congressional Budget Office, the US debt service was approximately $695 billion last fiscal year. This is approximately 2.5% of US GDP. These costs are projected to grow rapidly in the future.
Interestingly, debt service is one of the largest expenditures in the US budget, ranking third after Social Security and Medicare.
Meanwhile, Ukraine spends 16-17% of its total budget on servicing its public debt. That is, almost every sixth hryvnia of the budget goes to repay debt obligations. Ukraine has relatively high debt service costs due to its credit rating and the state of war. Interest on bonds here is higher than in the US. In addition, loans and grants from partners, as well as debt restructuring, help stabilise the situation.
Thus, while for the US, public debt is only a potential problem for the future, Japan’s example is a great warning for Ukraine.
Tetyana Morarash
