Wednesday, December 9, 2009

Greece Downgraded

Greece is in the news today. Their government bonds are facing a hefty downgrade, and interest rates demanded are rising briskly[1]. In short, the Greek government is running out of options to finance itself, to the point where a possible bailout from the European Union has been raised.

The article gives a puzzling statistic, which I think is a mistake. It reports Greek national debt is 125% of GDP, which would be a very manageable level of debt—better than major European economies as well as the U.S., all running in the ballpark of 150% of GDP, or Japan which is close to 200%. I wonder if they mean 125% in excess of GDP, or 225%.

This is an interesting number to me because it defines the point where governments are forced to stop deficit spending. In a recent post, I offered a debt-to-GDP ratio of somewhere between 2 to 6 based on examples we have from different countries. If the Greek balance sheet is going into a tailspin at 2.25, then we may be reaching government spending limits even sooner than I was guessing.

ADDENDUM: So I've been researching national debts, and I find numbers all over the place. 125% is a common number I see for Greece, with the U.S. and much of Europe hovering around 60-70%, and Japan at 170%. So clearly there are different ways to calculate the figure. Will post further when I see better consensus data. Here is some 2008 data, though, as we know, when it comes to public spending, 2009 was a busy year. What really matters is that national debt to tax collection ratio, of which GDP may be seen as a ballpark indicator of taxes the government can collect.

From the CIA World Factbook for Greece (2008): GDP is $344B, National Debt is 97.4% of GDP, Revenues are $127B, and expenditures are $144B.

1. Greece Government Bond Tumble Fails to Entice Pictet

No comments: