The McKinsey Global Institute (MGI) has just published a new report entitled “Debt and deleveraging: Uneven progress on the path to growth”. The new study reveals that the UK and Japan are far more indebted than those nations currently coming under attack from bond investors, namely Spain, France & Italy. This begs the question: Will the UK and Japan be the next sovereign debt dominoes to fall?
The chart below shows the total debt of the ten largest developed economies. The debt figures include: all loans and fixed-income securities of households, corporations, financial institutions, and government.
Chart: Total Debt Of The Ten Largest Developed Economies
Note: Chart taken from page 2 of McKinsey’s “Debt and deleveraging: Uneven progress on the path to growth” – January 2012.
As of Q2 2011, Japan had the largest total debt as a percentage of GDP with a figure of 512%. Japan was closely followed by the UK with a figure of 507%, while Spain was in third place with a much lower figure of 363%.
The reality is Japan and the UK pose just as much of a risk to bond holders as the Eurozone countries of Spain and Italy. When the so called “bond vigilantes” finally realised this, it’s reasonable to assume that these nations will also be the subject of failed bond auctions and significantly higher interest rates.