Investors seek stability and long-term growth opportunities, so the spotlight turns towards countries with low outstanding debt.

Understanding the Debt Conundrum

National debt, often measured as a percentage of a country's GDP, reflects the amount of money a government owes to domestic and foreign creditors.

While debt can be a tool for financing growth and development, excessive levels can pose significant risks to a nation's economy.

High debt levels can impose substantial interest payments as yields rise, diverting funds away from essential public services and investments. Excessive debt undermines a country's creditworthiness, potentially leading to higher borrowing costs and reduced investor confidence. Economic stability can be fleeting as excessive debt can trigger financial crises, currency depreciations, and recessionary pressures, hampering economic stability and growth prospects.

Household debt brings about many of the same issues through different channels, but can be closely linked. High levels of household debt make the consumer vulnerable to financial shocks and can crowd out consumer spending as consumption is taken away from goods and services, resulting in slowing economic growth. Household debt is often associated with a strong housing market, making the consumer extremely sensitive to interest rates and the price level of the housing market. The 2008 financial crisis was very much a function of excessive leverage in the private sector, which brought the system to its knees and was ultimately rescued by the state sector. In a sense, the government sector assumes many of the liabilities from the private sector.

As a result, one cannot look at government or household debt in isolation.

I have put together a simple chart from data provided by the IMF, which shows government debt and household debt as a percentage of GDP against the respective 10yr government bond yield.