Indebted Countries Come in Three Flavors

The IMF’s latest Fiscal Monitor includes a colorful chart of who owns the debt of six countries with well-known debt concerns:

The debt owned by foreign investors and foreign central banks are in red and yellow; the other colors represent debt owned domestically.

Based on IMF’s accounting, the six countries come in three flavors:

  • The “PIG” countries. Portugal, Ireland, and Greece owe most of their debt to foreigners.That’s a key reason their shaky finances are of international concern.
  • Japan. It owes almost all of its debt to itself (i.e., its citizens and institutions). That’s a key reason the international community isn’t freaking out about its debt levels.
  • The U.S. and U.K. The two “Uniteds” owe most of their debt to themselves (including their central banks, in orange), but also owe a substantial amount to foreigners. The yellow pie slice for foreign official holdings is, of course, notably large for the United States.

Note: Such cross-country comparisons inevitably involve accounting choices. Note, for example, that the IMF includes amounts owed to the Social Security Trust Fund in the U.S. debt measure, but does not include state and local debts. The first choice arguably understates America’s reliance on foreign borrowing, while the second arguably overstates it. 

Speculating on the Greek Crisis, Internet Edition

At the recent Milken Conference, I attended a panel moderated by Mike “Zappy” Zapolin. His claim to fame? He struck internet gold by developing generic web domains like,, and the all-too-timely

It’s much harder to follow in Zappy’s footsteps today since the obvious names are all gone. Except when new developments create new opportunities.

So it was last Thursday when I had an epiphany: Given the turmoil in Europe, Greece may eventually drop out of the euro. And instead of resuscitating the drachma, maybe Greece will opt for a currency called the “new drachma”.

I had this little insight about 2:35pm on Thursday afternoon. And then I got distracted by the hoopla over Wall Street’s “flash crash.”

I finally found my way over to today to see if “” was still available. And here’s what I found:

Whois Server:
Referral URL:
Status: clientDeleteProhibited
Status: clientTransferProhibited
Updated Date: 06-may-2010
Creation Date: 06-may-2010
Expiration Date: 06-may-2011

So close. Great minds think alike, he who hesitates is lost, and all that. I’m sure Zappy wouldn’t have let this opportunity slip by.

Of course, Greece isn’t the only country in trouble. So here’s a question: Would anyone like to register

As of 5:40pm DC time, it’s still available.

Can Greece Cut Its Deficit by 10% of GDP, Part II

As  I noted a few days ago, some nations have managed even larger budget adjustments than the one that Greece faces today.  Several commenters rightly noted, however, that this slim reed of hope becomes even slimmer when you consider other factors such as the pace of adjustment (Greece would have to cut very quickly) and its inability to devalue its currency (unless it leaves the eurozone).

Michael Cembalest of JP Morgan put together a sobering chart that highlights how severe Greece’s challenges are compared to other nations that have accomplished major budget adjustments in the past (hat tip: Paul Kedrosky at Infectious Greed):

Today Greece finds itself high on the vertical (i.e., needing a very rapid fiscal adjustment) with minimal growth prospects and no ability to devalue.

Can Greece Cut Its Deficit by 10% of GDP?

Greece needs money fast. The International Monetary Fund (IMF) and members of the Euro-zone have that money. But before they lend it to Greece (at very favorable interest rates), they are demanding that Greece get its fiscal house in order.

As a result, Greece is proposing an austerity plan that would reduce its out-of-control budget deficits (currently standing at more than 13% of GDP) by at least 10-11% of GDP.

You might wonder whether that’s possible. History suggests the answer is yes, at least in principle. Indeed, several countries have achieved even larger deficit reductions.

According to an IMF study that I discussed a few months ago, the past three decades have witnessed at least nine instances in which developed nations have cut their structural deficits by at least 10% of GDP:

  1. Ireland (20%, 1978-89)
  2. Sweden (13%, 1993-2000)
  3. Finland (13%, 1993-2000)
  4. Sweden (13%, 1980-87)
  5. Denmark (12%, 1982-86)
  6. Greece (12%, 1989-95)
  7. Israel (11%, 1980-83)
  8. Belgium (11%, 1983-1998)
  9. Canada (10%, 1985-99)

This list demonstrates that large-scale budget improvements are possible. But they don’t always stick. Sweden, for example, makes two appearances in the top nine. Its gains in the 1980s were undone in the financial crisis of the early 1990s, so it had to undertake a second round of austerity. And Greece itself is a repeat offender, as its gains from the early 1990s have all been lost.

Greece faces enormous practical and political challenges in its austerity efforts, and success is hardly guaranteed. The nation can take some encouragement, however, from the fact that other nations have addressed even larger budget holes.

With some hard work and luck, perhaps Greece will join Sweden as a two-time member of the Large Deficit Reduction Club.

Greece, the Other PIIGS, and “The Chastening”

Several colleagues recently suggested that now is a propitious time to read (or re-read) Paul Blustein’s “The Chastening.” The book recounts how the International Monetary Fund (IMF) and the G-7 nations struggled to combat the Asian, Russian, and Latin American economic crises of the late 1990s.

Having read the book while flying back and forth across the nation, I heartily agree. The Chastening is a great read if you want to get up to speed on many of the issues now posed by the “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain).

I particularly enjoyed (if that’s the right word) the number of characters, familiar from today’s Greece debacle, that appear in the book. For example:

* The government that used derivatives to hide its perilous financial situation (Thailand)

* The German leaders who denounced the moral hazard created by sovereign bailouts (most notably Hans Tietmeyer)

* The policymakers facing doubts (often well-founded) about whether assistance packages could really help or were just postponing the inevitable (and, in the meantime, bailing out some unsympathetic creditors).

With the benefit of ten years more hindsight, readers can also enjoy a certain “you ain’t seen nothing yet” thrill from passages about how scary the financial world looked during the crises of the late 1990s.

[Alan Greenspan the] Fed chief told the G-7 that in almost 50 years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks. (p. 334)

Unfortunately, we were all in for even worse in less than a decade. And now Greece is following in many of the steps of Korea, Thailand, Indonesia, Russia, and Brazil.

Greece Starts Selling … But Not Corfu

Greece is ready to start selling assets, according to the Wall Street Journal, but Corfu and the Parthenon are not on the auction block (no surprise there).

Instead, the government figures that by selling its stakes in a bank and a betting company, as well as its share of the national telecommunications company, it can raise €2.5 billion ($3.76 billion)—the equivalent of 1% of gross domestic product, its target for this year. That would only scratch the surface of Greece’s debt—which has surpassed the country’s €250 billion-a-year GDP—but would underscore for financial markets that Athens is serious about fixing its public finances.

The government also may put up for sale its shares in 15 other companies, including the water utility in Athens, a leading oil refiner, and several casinos. The Finance Ministry also wants to get rid of some Airbus A340 planes that it owns from the years before the country’s debt-ridden national carrier, Olympic Airlines, was privatized.

P.S. I love the transliterated name of the betting company: the Organization for Prognostication on Soccer Matches.

What Assets Could the United States Sell?

Several German lawmakers hit a nerve last week with their suggestion that Greece sell some of its assets in order to cut its debts. The German newspaper Bild summarized this line of reasoning quite memorably: “We give you cash, you give us Corfu.”

That zinger has prompted a cottage industry of possibly humorous efforts to tote up what Greece should consider selling. For example, the Christian Science Monitor has a slide show of the top ten items it thinks that Greece could sell, including the Parthenon and the Acropolis.

While no one (?) takes these suggestions seriously, they do raise an important point. Spending reductions and revenue increases are important when governments face budget pressures, but they are not the only option. Governments can also sell off assets.

Which raises a natural question. If push comes to shove, what could the United States sell in order to cut its debts?

The United States isn’t Greece, of course, and I am far from suggesting that we actually need to start selling. On the other hand, there’s plenty of rhetoric (some coming from me) that the United States should set a target for its publicly-held debt. If we do adopt one, we should keep in mind that asset sales may be one way that policymakers may try to reach it.

So what does the United States own?

That’s a hard question to answer completely, but a good place to start is the Financial Report of the United States Government. According to the 2009 report, the U.S. owned $2.7 trillion in assets at the end of 2009, up from only $2.0 trillion a year earlier. Many of these are off-limits (we aren’t going to sell the Capitol or the USS Nimitz), but some raise interesting questions.

For example, we own an impressive portfolio of financial assets:

  • $540 billion in direct loans (e.g., student loans) and mortgage-backed securities
  • $240 billion in TARP loans and equity investments (some of which have since be repaid)
  • $24 billion in a trust that invested in AIG
  • $65 billion in preferred stock in Fannie Mae and Freddie Mac

We also have a tidy amount of gold:

  • $250+ billion (The official financial statements report the gold as worth $11 billion, but that’s assuming gold is worth $42 per ounce. Gold prices are now about 25 times higher.)

Throw in another hundred billion or so for the value of the spectrum that we currently give away for free (not included in the financial statements), and we have a bit more than $1 trillion in assets that might conceivably be saleable. Of course, whether they would actually yield that trillion is an open question.

What about the ideas of the German lawmakers? Wouldn’t they suggest that we could sell Yosemite or Mount Rushmore as well? How much are they worth?

No one knows. Our nation’s accountants understandably make a point of not placing a dollar value on such “stewardship and heritage assets,” almost all of which should never–and will never–be on the auction block.

There might be a few saleable items lurking in there–the United States came close to selling the Presidio in San Francisco a few years back–but the real money is in the financial assets that the government owns.

The Spectre of Creative Bookkeeping

A spectre is haunting Europe — the spectre of creative bookkeeping.

In an article in this morning’s Wall Street Journal (“Debt Deals Haunt Europe“), Charles Forelle and Susanne Craig provide more examples of the “aggressive” bookkeeping that European nations have deployed to satisfy the deficit and debt targets of the Growth and Stability Pact.

Greece, of course, takes honors in the field, not just for its recent use of derivatives to hide liabilities (see my earlier post), but also for other creative moves in the past. For example, the authors report that Greece:

insisted to the Eurostat statistics authority that large portions of its military spending were “confidential” and thus excluded from deficit calculations. In 2000, Greece reported that it spent €828 million ($1.13 billion) on the military—about a fourth of the €3.17 billion it later said it spent. Greece admitted to underreporting military spending by €8.7 billion between 1997 and 2003.

Such shenanigans are hardly unique to the Greeks. Other players include:

  • Portugal, which “classified subsidies to the Lisbon subway and other state enterprises as equity purchases” in 2001, and
  • France, which “arranged a deal with the soon-to-be privatized France Telecom in 1997 under which the company paid the government a lump sum of more than €5 billion. In return, France agreed to assume pension liabilities for France Telecom workers. The billions from France Telecom helped narrow France’s budget gap.”

Although dated, these examples illustrate some basic strategies that governments use to conceal the size of their deficits and debts: pretend the spending does not exist (Greece), pretend that spending is really an investment (Portugal), or pretend the future pension liabilities aren’t real (France).

A topic for another day is how these strategies may have been used in the United States. Suffice it to say that strategy three–ignoring future pension costs–is widespread both in governments and the private sector.

How Governments Hide Their Liabilities

In my testimony to the Senate Budget Committee the other day, I recommended that Congress set specific fiscal targets for bringing our out-of-control deficits and debt under control. My particular suggestion? Get the publicly-held debt down to 60% of GDP in 2020.

By budgeting  standards, that makes for a great bumper sticker: “60 in 20“.

But as the New York Times points out in two articles today, a measurable target isn’t enough. You also need to make sure that the government doesn’t game the accounting to hide its liabilities.

Exhibit A is Greece. The story was originally broken by Der Spiegel earlier in the week, and is described in the NYT by Louise Story, Landon Thomas Jr., and Nelson D. Schwartz in “Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis“:

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. …

Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

The winning quote:

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Exhibit B are all the contingent liabilities of the United States government, of which Fannie Mae and Freddie Mac have been the most prominent (and expensive). In “Future Bailouts of America,” Gretchen Morgenson interviews budget expert Marvin Phaup (now at George Washington University and previously a colleague of mine at the Congressional Budget Office). She writes:

“If we are extending the safety net, extending the implied guarantee to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,” Mr. Phaup sad in an interview. “We can’t reduce the costs of these subsidies if we can’t recognize them.” …

As the number of firms with implicit government backing has risen because of the crisis, so too have the expected costs of those commitments, Mr. Phaup said. And yet, under current budget policy, those costs will be ignored until the recipient of the guarantee collapses — the precise moment when the guarantee is likely to cost taxpayers the most.

If we are going to set an explicit target for the publicly-held debt–60 in 20!–, we need to think carefully about what politicians may strategically omit from the calculation of the 60.