Visualizing Debt Detonation Rates Around the World

Recently we looked at the critical chart in sovereign debt analysis which painted a broad picture of how vulnerable sovereigns are to rises in interest rates. Well, today we thought we’d show you a couple of charts that should be paired with it. By the end of this piece you’ll have a good idea of the average debt costs that would detonate the accounts of major governments around the world.


The first thing we have to look at is public debt to central government tax revenue ratios. As mentioned previously:


[This gives you] 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).


As you can see, there’s one clear leader below… Japan. Even all the way back in 2009 (which is the year of the data used below) public debt was 20x central government tax revenue. If Japan’s average interest costs were to rise even a little it would take out a big chunk of central government tax revenues.


Public Debt to Central Government Tax Revenue Around the World – Click to enlarge. Feel free to share this chart on your website.


But it does depend on another thing too; the proportion of central government tax revenue that is already being spent on interest. So below we’ve got a chart of interest expense as a % of central government tax revenue for the same countries:


Interest Expense % Central Government Tax Revenue Around the World – Click to enlarge. Feel free to share this chart on your website.


So the final thing is to put these two concepts together. In the first chart we have a metric that shows the vulnerability of a sovereign to interest cost changes, and in the second we have a concrete fact about how significant interest expense is already. Now we can compare the rate that sets interest expense equal to revenue with the average debt cost. The basic question is; what % increase in a sovereign’s average debt cost would force them to pay all of their central government tax revenue in interest? Because if that point was reached they would have to borrow everything they spend …including the interest that would acrue on that borrowing… and you can see how things would spiral out of control very quickly.


So if you look at the chart below you can see the debt cost rate (yearly interest expense / public debt outstanding) in turquoise and the detonation rate in red. The countries at the top are in a relatively sound situation, and as you go down things get worse. You can see that some of the major developed nations are towards the bottom of the chart. Such is the problem with the zero interest rate policy; you get stuck in a situation where your detonation rate approaches your actual cost.


Detonation Rates Around the World – Click to enlarge. Feel free to share this chart on your website.


Finally we have to mention Japan once again simply because of the wild disparity that is present today. Creditors are charging the Japanese government record low interest rates at a time when their detonation rate is just a few hundred basis points (if that) away…


(Data Sources:’s archive of the CIA’s World Factbook, IMF’s GFS Yearbook 2010)


See here for our collection of rare historical economic data.

Posted Jan 31, 2013
  • rafael barbieri

    The problem is you are not distinguishing between different monetary regimes and the environments they find themselves in.  Investors are not allowing Japan to borrow at this rate.  The BOJ as you know sets the rate and investors can accept it or not.  Given the below zero rates of inflation in Japan it is logical for those seeking a credit risk free asset to hold japanese bonds.  

    Creditors are not charging the Japanese government anything.  This is not just a phenomena found in Japan either.  All around the world nations with currency sovereignty and near zero inflation are all setting policy rates at near zero.  Unless there is inflationary growth where the private sector can create less risky assets, investors will be more than happy to hold JGBs.  

    At some point those that anticipate bond market doom should explain why it hasn’t happened yet and how it would happen.  

    • Greshamslawcom

      Hi Rafael,

      Thanks for your response.We’ll go into the “why it hasn’t happened yet and how it would happen” part shortly on this blog.

  • ryanmj1

    This is great stuff, thanks for taking the time to put this together! Personally, I’d love to see a slightly modified version of your ‘interest expense to revenue’ chart based on ‘net interest’ instead of ‘gross.’ The US gov’t has a sweet deal set up where the Fed is monetizing the deficit and then remits the interest costs back to the US Treasury. This past year the remittance stood at $88.9 billion. I would assume other central banks do that with their respective governments, but I could be wrong about that. Any insight there? I’m just wondering how badly interest is subsuming federal budgets around the world. Once again, thanks for sharing your interesting insights from one economist to another.

  • Damien Golding

    I think it has to be taken into consideration how European countries use a large proportion of tax income for healthcare.

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