debt to GDP ratios

Japan has the highest ratio of public debt to GDP in the world (225.8% according to the authoritative CIA World Factbook), and also the lowest borrowing rate, if not in the world, at least of 20 countries monitored by the Financial Times.

So, if the debt to GDP ratio is so important, why is the yield on Japanese sovereign debt so low? The answer is that investors have confidence in the capacity and willingness of Japan to honour its obligations. Debt to GDP ratios are important, but only if they cause investors to fear an eventual default. Lower demand for a country’s debt causes bond prices to fall, thus yield to rise, pushing borrowing costs up. This could lead to austerity budgets and economic collapse, causing investors to become more skeptical, pushing borrowing costs ever higher. Something like this has happened in Greece, where interest rates – according to the FT – have risen to 15.09%, while interest rates in Germany have dropped to 2.44%.

Joe Weisenthal highlights a column on this very subject that I had missed. It was written by Yale University economist Robert Shiller, who is concerned that markets (even economists – two of whom he names) are paying far too much attention to debt ratios and thresholds and too little attention to economic fundamentals.

A paper written last year by Carmen Reinhart and Kenneth Rogoff, called

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