Ad Hoc Commentary – France, the fly in search of a windscreen

The FT had been showing a graphic on the burden of public debt:
Comparing the burden of public debt
The perspectives they had were:
1. net debt as a % of GDP
2. gross debt as a % of GDP
3. net debt per capita
4. debt per working-age person
5. share of world debt
These are good perspectives. But yours truly will delve into a different perspective using the same underlying data from:
1. IMF World Economic Outlook (Apr 2013) and
2. IMF Fiscal Monitor (Apr 2013).
Since capital flight is a common feature, we will first look at non-resident holdings of debt. Table A below are for 2012. As you can see, non-residents held $5.4t worth of US debt, followed by 1.7t Germany, 1.5t France, and 1.3t Japan. The foreign holdings are obtained by multiplying the ‘nominal GDP’ (source: World Economic Outlook) with the ‘non-resident holding of general government debt’ (source: Statistical Table 12a, Fiscal Monitor).
US has the lion share at 32% foreign holdings because it is the world’s reserve currency. Japan is the second largest bond market out there, but the foreign holdings at 9% is small compared to Japanese holdings. Some say the average Japanese lost all faith in real estate post 1989 and thus put their lifetime savings into bank deposits.
The Franco-German core of Europe has a combined foreign holdings of 62%. In fact, Europe as a whole seems to boast of a higher % of foreign holdings than most the world. There are many reasons but capital flight from Asia for the glitter of the European Union in the late 1990s could have contributed to it.
Today, we know that the lack of a single federal debt is the villain in Europe. If Merkelections on Sep 22 does not give any hope for Europe. If we see more austerity without the creation of a single debt good for banking reserves. Then, capital that hoped for a United States of Europe could easily return home.
The capital flight would naturally depend on current foreign holdings, and net debt position. The net-net debt column in Table A is the lower of the net debt (source: Statistical Table 4 and 8, Fiscal Monitor) and ‘net consolidated government and central bank debt’ (source: Statistical Table 15, Fiscal Monitor). You can think of it as the floor on the net debt position considering it is in the borrower’s interest to show credit-worthiness.
Among the top 10 countries in the foreign holdings of debt league, France looks like the fly in search of a windscreen. The socialist government seems to be less socialist or even non-socialist of late. Could it be that they saw the handwriting on the wall?
Table B below is an excerpt from Table 6 of Fiscal Monitor. It shows what we had been saying for some time – the first method to deal with a high debt burden is to refinance them into short term debt. Long time readers should not be surprised that the top 6 in the table are the US, Japan and the PIGS of Europe (Portugal, Italy, Greece, Spain).
Good luck in the markets.
Table A:
Country Gross Debt, %GDP Net net debt, %GDP GDP, $b Gross Debt, $b Gross Debt, %world Foreign holding, % Foreign holding, $b
United States 107% 71% 15,685 16,708 30% 32% 5,369.19
Germany 82% 43% 3,401 2,787 5% 61% 1,709.51
France 90% 61% 2,609 2,355 4% 64% 1,496.59
Japan 238% 106% 5,964 14,189 25% 9% 1,268.89
Italy 127% 77% 2,014 2,557 5% 35% 898.66
United Kingdom 90% 58% 2,441 2,204 4% 32% 702.34
Canada 86% 31% 1,819 1,558 3% 23% 365.89
Spain 84% 42% 1,352 1,137 2% 29% 330.53
Australia 27% 7% 1,542 419 1% 72% 302.33
Netherlands 72% 21% 773 555 1% 53% 296.52
Brazil 68% 35% 2,396 1,640 3% 18% 288.73
Table B:
Country Maturing Debt, %GDP Budget deficit, %GDP Gross financing needs, %GDP
Japan 49% 10% 59%
Italy 25% 3% 28%
United States 19% 7% 25%
Portugal 18% 5% 23%
Spain 14% 7% 21%
Greece 15% 5% 20%
Belgium 16% 3% 18%
France 13% 4% 17%