If you want to frighten your friends into thinking the U.S. is the worst debtor state in the world, here’s a quick an easy way to do so.
Citi have a chart of the expected fiscal cuts necessary to return countries to a 60% debt to GDP ratio (80% in the case of Japan) by 2020. You can see the U.S., considering its ageing population, is in the worst shape amongst many developed countries, if you just follow the chart (grey bars).
But there are quite a few reasons why this headline number is deceiving. Obviously, countries like Portugal, Greece, and Ireland are already facing debt crises. And Japan’s an outlier that shows if you have a domestic market for debt and a high savings rate, the headline debt to GDP ratio isn’t important.
And even if a ratings agency came in with a downgrade, it wouldn’t be a disaster.
From Citi’s Michael Schofield:
The likelihood of an EMU style credit crisis in the US, Japan or the UK, however, seems extremely remote to us. Our economists forecast a US budget deficit of 7% for 2012, even if the rating of US Treasuries were downgraded to AA from AAA, our fiscal risk framework suggests that this would, ceteris paribus, add about 20bp to their fiscal risk premium.
So this chart may look pretty discomforting, but it’s hiding a lot of details.