For some perspective on the European sovereign debt crisis, today’s chart illustrates the forecasted 2012 debt to GDP ratio for each of the PIIGS (red bars) plus a handful of today’s major economies (blue bars). While the PIIGS are currently enduring relatively high debt loads, it is noteworthy how some of the relatively safe nations/bond markets (e.g. United State and Germany) are not far behind. These relatively high debt loads are of concern as they could lead to higher taxes sometime in the future and can risk fiscal crises if bond holders sense an increasing risk of default. The current crisis in Europe provides a clear example of the bond market’s reaction (i.e. higher bond yields) to increased default fears. This leads to a very interesting case study that is Japan. With a debt to GDP ratio of over 200%, the Japanese 10-year bond yield is a relatively low 0.83%. Why? At the moment, the bond market feels that the Japanese have the ability to repay their debts — in part due to Japan’s perceived ability to raise taxes. To that end, Japanese Prime Minister Yoshiko Noda just won opposition support for the doubling of the nation’s sales tax to 10% by 2015. So it’s not just the amount of debt but also convincing your banker that you are good for it.

Quote of the Day
“I like players to be married and in debt. That’s the way you motivate them.” – Ernie Banks

Notes: