Government debt

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See also: List of countries by public debt
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Government debt (also known as public debt, national debt and sovereign debt)[1][2] is the
debt owed by a central government. (In the U.S. and other federal states, "government debt" may
also refer to the debt of a state or provincial, municipal or local government.) By contrast, the
annual "government deficit" refers to the difference between government receipts and spending
in a single year, that is, the increase of debt over a particular year.
Government debt is one method of financing government operations, but it is not the only
method. Governments can also create money to monetize their debts, thereby removing the need
to pay interest. But this practice simply reduces government interest costs rather than truly
canceling government debt,[3] and can result in hyperinflation if used unsparingly.

Governments usually borrow by issuing securities, government bonds and bills. Less
creditworthy countries sometimes borrow directly from a supranational organization (e.g. the
World Bank) or international financial institutions.

As the government draws its income from much of the population, government debt is an
indirect debt of the taxpayers. Government debt can be categorized as internal debt (owed to
lenders within the country) and external debt (owed to foreign lenders). Another common
division of government debt is by duration until repayment is due. Short term debt is generally
considered to be for one year or less, long term is for more than ten years. Medium term debt
falls between these two boundaries. A broader definition of government debt may consider all
government liabilities, including future pension payments and payments for goods and services
the government has contracted but not yet paid.

Contents
 1 History
 2 Government and sovereign bonds
 3 By country
 4 Municipal, provincial, or state bonds
 5 Denominated in reserve currencies
 6 Risk
 7 Clearing and defaults
 8 Economic policy basis
 9 Structure and risk of a public debt
 10 Problems
 11 Implicit debt
 12 See also
 13 References
 14 External links
o 14.1 Databases

History
The sealing of the Bank of England Charter (1694)

During the Early Modern era, European monarchs would often default on their loans or
arbitrarily refuse to pay them back. This generally made financiers wary of lending to the king
and the finances of countries that were often at war remained extremely volatile.

The creation of the first central bank in England - an institution designed to lend to the
government - was initially an expedient by William III of England for the financing of his war
against France. He engaged a syndicate of City traders and merchants to offer for sale an issue of
government debt. This syndicate soon evolved into the Bank of England, eventually financing
the wars of the Duke of Marlborough and later Imperial conquests.

A new way to pay the National Debt, James Gillray, 1786. King George III, with William Pitt
handing him another moneybag.

The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to
the plan which had been proposed by William Paterson three years before, but had not been
acted upon.[4] He proposed a loan of £1.2m to the government; in return the subscribers would be
incorporated as The Governor and Company of the Bank of England with long-term banking
privileges including the issue of notes. The Royal Charter was granted on 27 July through the
passage of the Tonnage Act 1694.[5]

The founding of the Bank of England revolutionised public finance and put an end to defaults
such as the Great Stop of the Exchequer of 1672, when Charles II had suspended payments on
his bills. From then on, the British Government would never fail to repay its creditors.[6] In the
following centuries, other countries in Europe and late around the world adopted similar
financial institutions to manage their government debt.
In 1815, at the end of the Napoleonic Wars, British government debt reached a peak of more
than 200% of GDP.[7]

Government and sovereign bonds

Main article: government bond

Public debt as a percent of GDP, evolution for USA, Japan and the main EU economies.

Public debt as a percent of GDP by CIA

Government debt as a percent of GDP by IMF

A government bond is a bond issued by a national government. Such bonds are most often
denominated in the country's domestic currency. Sovereigns can also issue debt in foreign
currencies: almost 70% of all debt in 2000 was denominated in US dollars.[8] Government bonds
are sometimes regarded as risk-free bonds, because national governments can raise taxes or
reduce spending, and in extreme cases they can "print more money" to redeem the bond at
maturity. Most developed country governments are prohibited by law from printing money
directly, that function having been relegated to their central banks. However, central banks may
buy government bonds in order to finance government spending, thereby monetizing the debt.
Government debt, synonymous to sovereign debt,[9] can be issued either in domestic or foreign
currencies. Investors in sovereign bonds denominated in foreign currency have exchange rate
risk: the foreign currency might depreciate against the investor's local currency. Sovereigns
issuing debt denominated in a foreign currency may furthermore be unable to obtain that foreign
currency to service debt. In the 2010 Greek debt crisis, for example, the debt is held by Greece in
Euros, and one proposed solution (advanced notably by World Pensions Council (WPC)
financial economists) is for Greece to go back to issuing its own drachma.[10][11] This proposal
would only address future debt issuance, leaving substantial existing debts denominated in what
would then be a foreign currency, potentially doubling their cost[12]

By country

General government debt as percent of GDP, USA, Japan, Germany.

Interest burden of public debt with respect to GDP.

National Debt Clock outside the IRS office in NYC, April 20, 2012
Further information: List of countries by public debt and List of countries by future gross
government debt

Public Debt is the total of all government borrowings less repayments that are denominated in a
country's home currency. CIA's World Factbook list only percentage of GDP, the debt amount
and per capita is calculated with GDP (PPP) and population figures of same report.

Using a debt to GDP ratio is one of the most accepted measures of assessing the significance of a
nation's debt. For example, one of the criteria of admission to the European Union's euro
currency is that an applicant country's debt should not exceed 60% of that country's GDP.

Public Debt of Countries Exceeding 0.5% of World, 2012 estimate (CIA World Factbook 2013)
[13]

Public Debt
Country  % of GDP per capita (USD)  % of World Public Debt
(billion USD)
World 56,308 64% 7,936 100.00%
 United
17,607 73.60% 55,630 31.27%
States*
 Japan 9,872 214.30% 77,577 17.53%
 China 3,894 31.70% 2,885 6.91%
 Germany 2,592 81.70% 31,945 4.60%
 Italy 2,334 126.10% 37,956 4.14%
 France 2,105 89.90% 31,915 3.74%
 United
2,064 88.70% 32,553 3.67%
Kingdom
 Brazil 1,324 54.90% 6,588 2.35%
 Spain 1,228 85.30% 25,931 2.18%
 Canada 1,206 84.10% 34,902 2.14%
 India 995 51.90% 830 1.75%
 Mexico 629 35.40% 5,416 1.12%
 South Korea 535 33.70% 10,919 0.95%
 Turkey 489 40.40% 6,060 0.87%
 Netherlands 488 68.70% 29,060 0.87%
 Egypt 479 85% 5,610 0.85%
 Greece 436 161.30% 40,486 0.77%
 Poland 434 53.80% 11,298 0.77%
 Belgium 396 99.60% 37,948 0.70%
 Singapore 370 111.40% 67,843 0.66%
 Taiwan 323 36% 13,860 0.57%
 Argentina 323 41.60% 7,571 0.57%
 Indonesia 311 24.80% 1,240 0.55%
 Russia 308 12.20% 2,159 0.55%
 Portugal 297 119.70% 27,531 0.53%
 Public Debt of Countries Exceeding 0.5% of World, 2012 estimate (CIA World Factbook 2013)
[13]

Public Debt
Country  % of GDP per capita (USD)  % of World Public Debt
(billion USD)
 Thailand 292 43.30% 4,330 0.52%
 Pakistan 283 50.40% 1,462 0.50%

* US data exclude debt issued by individual US states, as well as intra-governmental debt; intra-governmental debt
consists of Treasury borrowings from surpluses in the trusts for Federal Social Security, Federal Employees,
Hospital Insurance (Medicare and Medicaid), Disability and Unemployment, and several other smaller trusts; if data
for intra-government debt were added, "Gross Debt" would increase by about one-third of GDP. The debt of the
United States over time is documented online at the Department of the Treasury's website TreasuryDirect.Gov [14] as
well as current totals.[15]

[show]
  Outdated Tables

Municipal, provincial, or state bonds

Further information: Municipal bond

Municipal bonds, "munis" in the United States, are debt securities issued by local governments
(municipalities).

Denominated in reserve currencies

Governments often borrow money in a currency in which the demand for debt securities is
strong. An advantage of issuing bonds in a currency such as the US dollar, the pound sterling, or
the euro is that many investors wish to invest in such bonds. Countries such as the United States,
Germany, Italy and France have only issued in their domestic currency (or in the Euro in the case
of Euro members).

Relatively few investors are willing to invest in currencies that do not have a long track record of
stability. A disadvantage for a government issuing bonds in a foreign currency is that there is a
risk that it will not be able to obtain the foreign currency to pay the interest or redeem the bonds.
In 1997 and 1998, during the Asian financial crisis, this became a serious problem when many
countries were unable to keep their exchange rate fixed due to speculative attacks.

Risk
Main article: Credit risk

Although there is always default risk, lending to a national government in the country's own
sovereign currency is often considered "risk free" and is done at a so-called "risk-free interest
rate." This is because, up to a point, the debt and interest can be repaid by raising tax receipts
(either by economic growth or raising tax revenue), a reduction in spending, or failing that by
simply printing more money. It is widely considered that this would increase inflation and thus
reduce the value of the invested capital (at least for debt not linked to inflation). This has
happened many times throughout history, and a typical example of this is provided by Weimar
Germany of the 1920s which suffered from hyperinflation due to its government's inability to
pay the national debt deriving from the costs of World War I.[citation needed]

In practice, the market interest rate tends to be different for debts of different countries. An
example is in borrowing by different European Union countries denominated in euros. Even
though the currency is the same in each case, the yield required by the market is higher for some
countries' debt than for others. This reflects the views of the market on the relative solvency of
the various countries and the likelihood that the debt will be repaid. Further, there are historical
examples where countries defaulted, i.e., refused to pay their debts, even when they had the
ability of paying it with printed money. This is because printing money has other effects that the
government may see as more problematic than defaulting.

A politically unstable state is anything but risk-free as it may—being sovereign—cease its

payments. Examples of this phenomenon include Spain in the 16th and 17th centuries, which
nullified its government debt seven times during a century, and revolutionary Russia of 1917
which refused to accept the responsibility for Imperial Russia's foreign debt.[17] Another political
risk is caused by external threats. It is mostly uncommon for invaders to accept responsibility for
the national debt of the annexed state or that of an organization it considered as rebels. For
example, all borrowings by the Confederate States of America were left unpaid after the
American Civil War. On the other hand, in the modern era, the transition from dictatorship and
illegitimate governments to democracy does not automatically free the country of the debt
contracted by the former government. Today's highly developed global credit markets would be
less likely to lend to a country that negated its previous debt, or might require punishing levels of
interest rates that would be unacceptable to the borrower.

U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. This
disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's
currency. In addition, a risk-free status implicitly assumes the stability of the US government and
its ability to continue repayments during any financial crisis.

Lending to a national government in a currency other than its own does not give the same
confidence in the ability to repay, but this may be offset by reducing the exchange rate risk to
foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by
starting a hyperinflation; and this increases the credibility of the debtor. Usually small states with
volatile economies have most of their national debt in foreign currency. For countries in the
Eurozone, the euro is the local currency, although no single state can trigger inflation by creating
more currency.

Lending to a local or municipal government can be just as risky as a loan to a private company,
unless the local or municipal government has sufficient power to tax. In this case, the local
government could to a certain extent pay its debts by increasing the taxes, or reduce spending,
just as a national one could. Further, local government loans are sometimes guaranteed by the
national government, and this reduces the risk. In some jurisdictions, interest earned on local or
municipal bonds is tax-exempt income, which can be an important consideration for the wealthy.

Clearing and defaults

Main articles: sovereign default, clearing (finance) and default (finance)

Public debt clearing standards are set by the Bank for International Settlements, but defaults are
governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the
International Monetary Fund can take certain steps to intervene to prevent anticipated defaults. It
is sometimes criticized for the measures it advises nations to take, which often involve cutting
back on government spending as part of an economic austerity regime. In triple bottom line
analysis, this can be seen as degrading capital on which the nation's economy ultimately depends.

Those considerations do not apply to private debts, by contrast: credit risk (or the consumer
credit rating) determines the interest rate, more or less, and entities go bankrupt if they fail to
repay. Governments need a far more complex way of managing defaults because they cannot
really go bankrupt (and suddenly stop providing services to citizens), albeit in some cases a
government may disappear as it happened in Somalia or as it may happen in cases of occupied
countries where the occupier doesn't recognize the occupied country's debts.

Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of
government. When New York City declined into what would have been a bankrupt status during
the 1970s (had it been a private entity), by the mid-1970s a "bailout" was required from New
York State and the United States. In general, such measures amount to merging the smaller
entity's debt into that of the larger entity and thereby giving it access to the lower interest rates
the larger entity enjoys. The larger entity may then assume some agreed-upon oversight in order
to prevent recurrence of the problem.

Economic policy basis

According to Modern Monetary Theory, public debt is seen as private wealth and interest
payments on the debt as private income. The outstanding public debt is an expression of the
accumulated previous budget deficits which have added financial assets to the private sector,
providing demand for goods and services. Adherents of this school of economic thought argue
that the scale of the problem is much less severe than is popularly supposed.[18]

Wolfgang Stützel showed with his Saldenmechanik (Balances Mechanics) how a comprehensive
debt redemption would compulsorily force a corresponding indebtedness of the private sector,
due to a negative Keynes-multiplier leading to crisis and deflation. [19]

In the dominant economic policy generally ascribed to theories of John Maynard Keynes,
sometimes called Keynesian economics, there is tolerance for fairly high levels of public debt to
pay for public investment in lean times, which, if boom times follow, can then be paid back from
rising tax revenues. Empirically, however, sovereign borrowing in developing countries is
procyclical, since developing countries have more difficulty accessing capital markets in lean
times.[20]

As this theory gained global popularity in the 1930s, many nations took on public debt to finance
large infrastructural capital projects—such as highways or large hydroelectric dams. It was
thought that this could start a virtuous cycle and a rising business confidence since there would
be more workers with money to spend. Some[who?] have argued that the greatly increased military
spending of World War II really ended the Great Depression. Of course, military expenditures
are based upon the same tax (or debt) and spend fundamentals as the rest of the national budget,
so this argument does little to undermine Keynesian theory. Indeed, some[who?] have suggested
that significantly higher national spending necessitated by war essentially confirms the basic
Keynesian analysis (see Military Keynesianism).

Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet
How to Pay for the War, published in the United Kingdom in 1940. Since the war was being paid
for, and being won, Keynes and Harry Dexter White, Assistant Secretary of the United States
Department of the Treasury, were, according to John Kenneth Galbraith, the dominating
influences on the Bretton Woods agreements. These agreements set the policies for the Bank for
International Settlements (BIS), International Monetary Fund (IMF), and World Bank, the so-
called Bretton Woods Institutions, launched in the late 1940s for the last two (the BIS was
founded in 1930).

These are the dominant economic entities setting policies regarding public debt. Due to its role in
setting policies for trade disputes, the World Trade Organization also has immense power to
affect foreign exchange relations, as many nations are dependent on specific commodity markets
for the balance of payments they require to repay debt.

Structure and risk of a public debt

This section does not cite any references or sources. Please help improve this section
by adding citations to reliable sources. Unsourced material may be challenged and
removed. (January 2015)

Understanding the structure of public debt and analyzing its risk requires one to:

 Assess the expected value of any public asset being constructed, at least in future tax
terms if not in direct revenues. A choice must be made about its status as a public good—
some public "assets" end up as public bads, such as nuclear power plants which are
extremely expensive to decommission—these costs must also be worked into asset
values.
 Determine whether any public debt is being used to finance consumption, which includes
all social assistance and all military spending.
 Determine whether triple bottom line issues are likely to lead to failure or defaults of
governments—say due to being overthrown.
  Determine whether any of the debt being undertaken may be held to be odious debt,
which might permit it to be disavowed without any effect on a country's credit status.
This includes any loans to purchase "assets" such as leaders' palaces, or the people's
suppression or extermination. International law does not permit people to be held
responsible for such debts—as they did not benefit in any way from the spending and had
no control over it.
 Determine if any future entitlements are being created by expenditures—financing a
public swimming pool for instance may create some right to recreation where it did not
previously exist, by precedent and expectations.

Problems
Sovereign debt problems have been a major public policy issue since World War II, including
the treatment of debt related to that war, the developing country "debt crisis" in the 1980s, and
the shocks of the 1998 Russian financial crisis and Argentina's default in 2001.

Not all developing countries have been affected to the same extent. For example Yugoslavia had
low government debt (perhaps because it was unable to borrow on world markets)[citation needed] until
its breakup and the coming of democracy, when the new national governments started to borrow
money from the IMF. Croatia has a government debt of $47 billion today while the whole of
Yugoslavia (six times as many people as Croatia) in 1980 had debt of $14 billion.[citation needed]

Global debt is of great concern[citation needed] since interest payments can often place great demands
on governments and individuals. This has led to calls[according to whom?] for universal debt relief for
poorer countries.[citation needed]

Implicit debt
Government "implicit" debt is the promise by a government of future payments from the state.
Usually this refers to long term promises of social payments such as pensions and health
expenditure; not promises of other expenditure such as education or defense (which are largely
paid on a "quid pro quo" basis to government employees and contractors).

A problem with these implicit government insurance liabilities is that it is hard to cost them
accurately, since the amounts of future payments depend on so many factors. First of all, the
social security claims are not "open" bonds or debt papers with a stated time frame, "time to
maturity", "nominal value", or "net present value".

In the United States, as in most other countries, there is no money earmarked in the government's
coffers for future social insurance payments. This insurance system is called PAYGO (pay-as-
you-go). Alternative social insurance strategies might have included a system that involved save
and invest.

Furthermore, population projections predict that when the "baby boomers" start to retire, the
working population in the United States, and in many other countries, will be a smaller
percentage of the population than it is now, for many years to come. This will increase the
burden on the country of these promised pension and other payments—larger than the 65
percent[21] of GDP that it is now. The "burden" of the government is what it spends, since it can
only pay its bills through taxes, debt, and increasing the money supply (government spending =
tax revenues + change in government debt held by public + change in monetary base held by the
public). "Government social benefits" paid by the United States government during 2003 totaled
$1.3 trillion.[22]

In 2010 the European Commission required EU Member Countries to publish their debt
information in standardized methodology, explicitly including debts that were previously hidden
in a number of ways to satisfy minimum requirements on local (national) and European (Stability
and Growth Pact) level.[23]