A GREEK TRAGEDY IN THE EUROZONE

Investors have been disheartened by the events taking place in Greece over the past few weeks, which have been a setback to the global financial recovery. It’s interesting to take a look at Greece’s External debt-to-GDP ratio and compare that to other countries to see how dire the situation really is. You might be surprised to know Greece’s debt-to-GDP ratio isn’t actually the highest in the Eurozone.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF and World Bank. This is similar to how an individual’s debt can include business loans, mortgages, credit card debt or student loans. Debt-to-GDP measures financial leverage of an economy.

World Top Twenty Debtors Nations

Source: External Debt (2009) information from The World Bank, GDP (2009) information from the CIA World Factbook.

When the European Union (EU) was formed, there was a fiscal deficit limit of 3 percent of GDP, but very few countries have honored that. Greece has a fiscal deficit of 12 percent of its GDP, four times the limit specified in the eurozone agreement. When the Eurozone was formed, its criteria also called for a government’s debt-to-GDP ratio to be below 60 percent—which also hasn’t been honored either.

So what does this mean? According to the World Bank and the IMF, external debt sustainability (the ability of a country to repay foreign debts) should not be more than 250 percent of a country's revenue or 150 percent of exports. Higher external debt is harmful to the economy and most likely will result in default.

So what are the causes of the high debt-to-income ratios in Europe?
Expensive labor.
Expensive exports.
Expensive currency.
Small population.
High levels of taxation and large social welfare systems.

Deficit spending, government debt and private sector borrowing are the norm in most western countries, but due in part to the financial crisis, some nations and economies are in considerably worse debt positions than others.

Most popular rhetoric on the topic would claim that wealthy countries have grown accustomed to being wealthy and they are enthralled by consumerism – it could be argued that this high level of debt could be a result of a culture that is used to and willing to buy now, and pay later…even if it means with interest.