Figure 1 – Debt to GDP (the redder, the more “overleveraged”

On June 17th, Greece’s take on austerity and the European Union will be clearer.  The vote and the general financial problems of Greece may end up being guideposts for other creditors and debtors in dealing with overleveraging.   Greece, of course, isn’t the only country to be overleveraged.  In reviewing a list of 40 countries with high frequency debt and government bond yield data, the ten most overleveraged countries are (debt to GDP in parentheses): Japan (212%), Greece (165%), Italy (120%), Ireland (108%), Portugal (108%), United States (103%), Singapore (101%), and Belgium (98%).  Some of these, like Greece, are perceived as “unsafe” political entities, and thus, pay the price of being “unsafe” through higher bond yields.  Others are perceived as “safe” from most or all forms of default, and thus earn the good graces of bond market investors.  In rationing out the “safe” and “unsafe” overleveraged countries, the ten perceived “safe” overleveraged countries are: Japan, the United States, Singapore, Belgium, France, Canada, the United Kingdom, Germany, Austria, and the Netherlands.  Of these, six reside within the European Union.  One has to wonder how long these ten “safe” overleveraged nations can stay on the good side of a generally rational bond market.

Figure 2 – Bond Yield against Debt per GDP (Greece and Japan not shown)

In the past year, 11 of these 40 countries found out what it is like to be on the outer edge of the good graces of the bond market, with Greece leading the way (up about 140% over last year’s yield of 12.75%), followed by South Africa (up 84% over last year’s yield of 4.5%), Portugal (up 40% over last year’s yield of 8.5%), Hungary (up 23% over last year’s yield of 7.2%), Peru (up 23% over last year’s yield of 5.5%), Spain (up 21% over last year’s yield of 5.3%), Italy (up 18% over last year’s yield of 4.8%), Columbia (up 8% over last year’s yield of 7.0%), Russia (up 7% over last year’s yield of 5.6%), India (up 4% over last year’s yield of 8.0%), and Brazil (up 1% over last year’s yield of 12.4%).

Why is Greece now in trouble with bond market investors?  It’s not as if Greece’s lack of budgeting constraint was unknown until this year.  The real answer is complex, and comes down to such things as economic growth, revenue, timing of expenditure needs, timing of bond rollovers, political risk, and perception of risk.  Of these factors mentioned, it’s the whipsawing of perception risk that is difficult for investors and countries to manage.  Of the “safe” overleveraged counties in the green box, which ones will have experienced the whipsawing of their perception risk at this time next year?  Contagion risk in the European Union is high right now as is U.S. political risk?  Presently, it appears the bond markets are paying more attention to the countries in the red box: “unsafe” overleveraged countries.  But, “safe” never means safe when you’re an overleveraged country.  Triggers in the actual perception of risk could be many, but what we do know is that one or two of the “safe” countries will probably shift away from being a safe haven.  The shift from “safe” to “unsafe” will no doubt leave some bitter taste in the mouths of some investors and political leaders.

Data 1: (Zoom in the Scribd doc to have a better look)

Perceived as Safe Really Are Not – Data

Data 2:  (Zoom in the Scribd doc to have a better look)
Perceived as Safe Really Are Not – Data2(1)

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