The debt profile of countries can provide valuable insights into the risk that they face in terms of a Sovereign default.
I have mapped the debt profile against 2 parameters
- Total debt as a % of GDP : The higher the % the more is the risk of default
- Average maturity of marketable debt in years: The shorter the term the greater the risk. The logic behind this is as follows.
In case of a longer term of maturity – If markets lose faith, additional borrowing at the new yield (interest rate) will not be possible but the existing loan interest payments will not be substantially affected.
In case of a shorter term maturity-If markets lose faith, the existing loans will have to be rolled over at prohibitively higher interest rates which in itself can cause countries to default
This is a rather rudimentary analysis and only aims at giving pointers as to what could be the possible outcomes.
The data is for the year 2009.
Source: http://www.ft.com/cms/s/0/c71a3b60-73c4-11df-bc73-00144feabdc0.html
The graph shows that Japan, Italy and Greece are in the High risk region (shaded area). Their debt as a % of GDP is very high and the average maturity of debt is below average, creating a tangible risk for sovereign default.
U.S and Portugal seem to be heading into the risk region. (U.S however has far more headroom considering that all its debt is denominated in its own currency).
UK is a peculiar case with high levels of debt but having the comfort of long term maturity. It is a sign that fiscal austerity today (short term pain) can improve their debt profile before the day of future reckoning (paying off creditors). Which means lower cost of capital tomorrow (long term gain).