21st October 2011
However, the Chinese remain – for the time being at least – committed buyers. This is important because this crisis has not been about the level of debt, but the willingness of investors to keep buying that debt.
A Debt Market
It is why, for example, Japan has not been considered a crisis area, despite its extremely high debt levels.
It has an army of committed domestic buyers for its debt who are unlikely to desert it when it seeks to roll over that debt. In this piece on Time magazine's site, it says: "Japan can have a debt crisis only if the Japanese start one."
It is also one of the reasons that the UK has managed to hang onto its triple-A credit rating. As this document from the Office of National Statistics shows, only around a third of UK government debt is held by overseas buyers.
The remainder is held by pension funds, insurance companies and other financial institutions. Equally, UK debt is generally long in duration, with around 36% over 15 years in length, meaning the UK does not have to keep rolling it over.
The problem with short term debt
This is part of the problem for the Eurozone countries. In its recent downgrade of Spain, S&P specifically referred to the short-term nature of much of its debt as a factor in its economic difficulties: "Spanish monetary and financial sector institutions accounted for slightly over one-half of total external debt at the end of Q2 2011, 57% of which is short-term debt. In our opinion, this leaves the economy vulnerable to sudden shifts in external financing conditions."
It may yet be a problem for the US. As this chart from The Guardian shows, around three-quarters of US debt is held by Japan and China. Partly this is necessity. US treasuries are the largest and most liquid market in the world and one of the few areas China can invest its vast wealth, but there are plenty of alarmists who believe that the reliance on China may be a problem for the US.
China & US
For example, if this site is to be believed, the Chinese are already considering bringing down their holdings of US treasuries. This would create some vulnerability for the US and would certainly put pressure on the dollar.
Commenter DangerDeath sees it as part of the rebalancing away from developing economies and towards emerging markets: "Many old certainties, from the hegemony of the US dollar to the stability of the global financial system, are disappearing before our very eyes. Reorganization will undoubtedly become the watchword. The question is, what will history say of the calibre of today's G7 leaders?"
Three flavors of debt
This blog by David Marron suggests that debt essentially comes in three flavours: those who owe most of their debt to foreigners, those who owe most of the debt to themselves and those who do a combination of both. The first group is the key one for the global economy. No-one gets too exercised if the Japanese government does not pay back Japanese citizens (except the Japanese themselves, of course). Governments care very much, however, if other countries do not pay back their citizens.
Marron suggests they are perhaps right to do so: "Reinhart and Rogoff conclude that external defaults are more common than domestic defaults, presumably because of greater willingness to impose losses on foreigners. However, the difference is not that great – domestic default is more common than one might expect."
This ties in neatly with the European problem. The reason why the situation is so alarming is that a default has the potential to bring down a whole raft of other countries with it because they are all holding the debt. Alarmist statistics about debt levels are frightening but they are not as important as who is holding the debt and whether they will continue to buy.
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