May 23, 2011 4 Comments
Over the past few years the “Japan is going to default” theme has proven quite popular both in blogs and regular financial media. It’s true that the headline number (over 200% debt to gdp !) is eye-catching – as it’s 3 time more than most developed nations.
But this number is also very misleading, and this post will (hopefully) explain why Debt to GDP ratios are irrelevant when assessing a nation’s likelihood to default. I’ll use two groups of countries to illustrate the points made : Japan and Greece (very high debt to gdp), and Germany, Canada & USA (similar and average debt to gdp), to show that they all have very different risk profiles.