The Critical Chart in Sovereign Debt Analysis
Most people look at debt-to-GDP ratios when thinking about sovereign debt. It’s a good measure, but there’s a better one that goes for the jugular; the ratio of public debt to government revenue. By changing the denominator in this way you get a direct feel for how increases in interest rates affect government accounts. For example, when public debt is 10X government revenue then a 1% increase in the average interest rate paid on public debt forces the government to use an additional 10% of its revenues for paying interest. In short, this metric gives you a clear idea of just how easily a government could reach the keynesian endpoint (i.e. the point at which all of government revenues are used to pay interest alone).
So, to give you a macro view of sovereign leverage around the world here we present a chart with public debt to government revenue ratios in 95 countries. Countries with a GDP over $40bn are included in the chart and major countries ($800bn+ GDP) are highlighted:
[Note: Bear in mind that “government revenue” includes items such as social contributions and net revenues from public enterprises here. We mention this because in the case of Japan sovereign debt was some 19X central government tax revenue in 2010, and it’s higher today. For definitions of the data used in the chart see here and here. For more on this subject see Kyle Bass’s Feb 2011 letter where he goes into this subject in detail.]