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. 

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.