Social Europe

politics, economy and employment & labour

  • Projects
    • Corporate Taxation in a Globalised Era
    • US Election 2020
    • The Transformation of Work
    • The Coronavirus Crisis and the Welfare State
    • Just Transition
    • Artificial intelligence, work and society
    • What is inequality?
    • Europe 2025
    • The Crisis Of Globalisation
  • Audiovisual
    • Audio Podcast
    • Video Podcasts
    • Social Europe Talk Videos
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Shop
  • Membership
  • Ads
  • Newsletter

Global Debt Is At Its Peak: Italy Stands Better Than We Think

by Marcello Minenna on 28th November 2018 @MarcelloMinenna

Share on TwitterShare on FacebookShare on LinkedIn
Marcello Minenna

Marcello Minenna

In the second quarter of 2018 global debt reached a new peak, climbing to 260 trillion dollars ($260,000 billion). At the same time, the global debt to GDP ratio crossed the 320% threshold for the first time. Of that total, 61 percent (160trn) is private debt of the non-financial sector, while only 23 percent is represented by much vilified government debt.

The US alone has issued more than 30 percent of the outstanding public debt, with an appreciable acceleration in the last two years under Trump management. The US Treasury is followed by the Japanese and Chinese debt agencies and, at a greater distance, by the biggest Eurozone economies. The values reported by Chinese public agencies must be evaluated with caution because of repeated cases of falsification of statistics, even by government officials. It is therefore likely that not only Beijing’s public debt but also that of Chinese corporations, already the highest in the world, could be more alarming than official estimates would suggest.

Historically, the debt of a country, both public and private, tends to grow over time in positive correlation with the size of the economy, with the notable exception of sudden defaults that wipe out large portion of debt. Hence the huge size of total debt cannot provide per se enough information about its sustainability. Nor is it possible to infer that low total debt is a sign of financial stability. Indeed, it is more likely that a very low level, or even the absence of debt, would imply a complete lack of confidence such as to exclude all national economic agents from international credit markets, as was the case in Argentina in the five years following the dramatic 2002 default.

In a proper perspective, a fair assessment should take into account the relative size of the debt relative to GDP (see Figure).

Global rankings, by using this more suitable measure, are reversed: Luxembourg ends up in first place with a total debt equal to 434 percent of GDP, almost all composed of corporate debt. At a distance, we observe Japan’s debt total hovering at 373 percent characterized by a preponderant weight of the public component (216 percent). The high incidence of both public and private debt places France, Spain and the United Kingdom in the top eight while Italy appears only in 9th place, with a well-balanced total debt ratio of 265% percent of GDP, due to low household and corporate debt that offsets the impact of consistent public debt.

Join our growing community newsletter!

"Social Europe publishes thought-provoking articles on the big political and economic issues of our time analysed from a European viewpoint. Indispensable reading!"

Polly Toynbee

Columnist for The Guardian

Thank you very much for your interest! Now please check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

Powered by ConvertKit

Paradoxes abound

But even a limited debt to GDP ratio cannot be considered a sign of virtue or economic health. At the bottom of the rankings stand out the paradoxical cases of Argentina and Turkey. Although both countries have total debts under control (private debt virtually non-existent in Argentine and Turkish public debt at the ridiculous value of 28 percent of GDP) they are still in danger of losing access to markets due to a currency and balance of payments crises. In a glaring apparent paradox, short-term interest rates are at 70 percent in Argentina’s low-debt financial environment and stably negative in the Japan of the monstrous debt.

Referring only to public debt to issue judgments about the state of an economy, perhaps in relation with arbitrary thresholds, is always a bad practice that leads to erroneous conclusions. The criteria that the market uses to assess the debt’s solvency are multiple: the percentage of debt held by foreign/domestic investors, the fact that the debt is issued under national/foreign law, the growth of the economy, the financial wealth of citizens, the efficiency of tax collection, monetary sovereignty etc. In the case of Japan, for example, 90 percent of the debt is in the hands of the central bank, pension funds and domestic banks and is almost perfectly offset by the consistent financial wealth of public institutions. It is almost impossible to imagine a confidence crisis that would cast doubts on the solvency of the Japanese government.

Likewise, the fact that Eurozone countries are unable to manage monetary policy autonomously transforms all public debt de facto as if it were subjected to foreign law, a condition that is enormously more complex to handle. Moreover, this debt is on average to the tune of more than 70 percent held by foreign investors, a category by definition more reactive in negotiating on secondary markets and in feeding generalized panic selling.

Trouble in store

There’s more. Official statistics do not consider the troubling issue of “implicit debt”, i.e. the burden represented by the present value of financial commitments made by governments on pensions and healthcare. In general, these future debts do not appear in the national accounts for well-founded reasons connected to the difficulties in estimating costs spread over very long time horizons. If these hidden charges were to be taken into account, US debt would, for example, quintuple to over $100trn. But Spain, Luxembourg and Ireland would be in the worst shape, since they would see their liabilities rise by more than tenfold, up to over 1000 percent of GDP in the Irish case. On the other hand Italy, from the point of view of implicit debt, under current legislation is the most virtuous European country.


We need your help! Please join our mission to improve public policy debates.


As you may know, Social Europe is an independent publisher. We aren't backed by a large publishing house or big advertising partners. For the longevity of Social Europe we depend on our loyal readers - we depend on you. You can support us by becoming a Social Europe member for less than 5 Euro per month.

Thank you very much for your support!

Become a Social Europe Member

At a global level, corporate debt is the variable that markets fear most. A heavily indebted private sector is vulnerable to increasing interest rates, after years of artificially low rates that have favoured the loans expansion and the reduction of corporate equity via massive share buybacks. The inherent instability of debt versus equity funding suggests that the next slowdown in growth could develop into an unusually strongly freeze of corporate investments. In Italy that already happened during the Great Recession of 2008-2009: for each percentage point of decline in credit growth, a four-point contraction in investments followed in enterprises most dependent on bank credit; two points in those financially more independent. An economic disaster not to be repeated.

Share on TwitterShare on FacebookShare on LinkedIn
Home ・ Economy ・ Global Debt Is At Its Peak: Italy Stands Better Than We Think

Filed Under: Economy

About Marcello Minenna

Marcello Minenna is head of the quantitative analysis unit in Consob (the Italian Securities and Exchange Commission). He has taught quantitative finance at Bocconi University and at the London Graduate School of Mathematical Finance. He is a regular writer for the Wall Street Journal and Corriere della Sera and is a member of an advisory group which supports the economic analysis of the biggest Italian trade union, CGIL.

Partner Ads

Most Popular Posts

Thomas Piketty,capital Capital and ideology: interview with Thomas Piketty Thomas Piketty
sovereignty Brexit and the misunderstanding of sovereignty Peter Verovšek
China,cold war The first global event in the history of humankind Branko Milanovic
centre-left, Democratic Party The Biden victory and the future of the centre-left EJ Dionne Jr
Covid 19 vaccine Designing vaccines for people, not profits Mariana Mazzucato, Henry Lishi Li and Els Torreele

Most Recent Posts

BBC,public value Don’t defund the BBC Mariana Mazzucato
inequalities,dissatisfaction with democracy Inequalities and democratic corrosion Piergiuseppe Fortunato
Deregulation,Better Regulation,one in one out Leaving behind the EU’s deadly addiction to deregulation Patrick ten Brink
regulation Making EU regulation better for all Isabelle Schömann
governance The crisis after the crisis Christof Schiller, Thorsten Hellmann and Karola Klatt

Other Social Europe Publications

RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era
The transformation of work
The coronavirus crisis and the welfare state

Social Europe Publishing book

With a pandemic raging, for those countries most affected by Brexit the end of the transition could not come at a worse time. Yet, might the UK's withdrawal be a blessing in disguise? With its biggest veto player gone, might the European Pillar of Social Rights take centre stage? This book brings together leading experts in European politics and policy to examine social citizenship rights across the European continent in the wake of Brexit. Will member states see an enhanced social Europe or a race to the bottom?

'This book correctly emphasises the need to place the future of social rights in Europe front and centre in the post-Brexit debate, to move on from the economistic bias that has obscured our vision of a progressive social Europe.' Michael D Higgins, president of Ireland


MORE INFO

Hans Böckler Stiftung Advertisement

Renewing labour relations in the German meat industry: an end to 'organised irresponsibility'?

Over the course of 2020, repeated outbreaks of Covid-19 in a number of large German meat-processing plants led to renewed public concern about the longstanding labour abuses in this industry. New legislation providing for enhanced inspection on health and safety, together with a ban on contract work and limitations on the use of temporary agency employees, holds out the prospect of a profound change in employment practices and labour relations in the meat industry. Changes in the law are not sufficient, on their own, to ensure decent working conditions, however. There is also a need to re-establish the previously high level of collective-bargaining coverage in the industry, underpinned by an industry-wide collective agreement extended by law to cover the entire sector.


FREE DOWNLOAD

ETUI advertisement

Working on digital labour platforms: a trade union guide for trainers on crowd-, app- and platform-based work

This guide aims to raise awareness about the reality of platform work among national trade union organizations. It provides trade union trainers with all the necessary pedagogical elements to deliver education activities at national level, compatible with various professional sectors as well as different time/resource availabilities.

It covers a wide range of needs:

• information on the concept of platform work, its evolution and impact on the labour market;

• development of competences for trade union representatives involved in social dialogue in sectors with a high prevalence of platform workers, and

• raised awareness of the importance of trade union action for decent working conditions for platform workers.


DOWNLOAD HERE

Eurofound advertisement

Industrial relations: developments 2015-2019

Eurofound has monitored and analysed developments in industrial relations systems at EU level and in EU member states for over 40 years. This new flagship report provides an overview of developments in industrial relations and social dialogue in the years immediately prior to the Covid-19 outbreak. Findings are placed in the context of the key developments in EU policy affecting employment, working conditions and social policy, and linked to the work done by social partners—as well as public authorities—at European and national levels.


CLICK FOR MORE INFO

Foundation for European Progressive Studies Advertisement

FEPS Progressive Yearbook

Twenty-twenty has been an extraordinary year. The Covid-19 pandemic and the multidimensional crisis that it triggered have boosted existing trends and put forward new challenges. But they have also created unexpected opportunities to set a new course of action for the European Union and—hopefully—make a remarkable leap forward in European integration.

The second edition of the Progressive Yearbook, the yearly publication of the Foundation for European Progressive studies, revolves around the exceptional events of 2020 and looks at the social, economic and political impact they will have in 2021. It is a unique publication, which aims to be an instrument for the progressive family to reflect on the recent past and look ahead to our next future.


CLICK HERE

About Social Europe

Our Mission

Article Submission

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Find Social Europe Content

Search Social Europe

Project Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

.EU Web Awards