The Pigs’ External Debt Problem
The PIGS’ external debt problem
Ricardo Cabral
8 May 2010, VOX.EU
Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries ' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling.
Financial markets are focused on the public finances of Portugal, Ireland, Greece, and Spain (the “PIGS”). The PIGS´ public profligacy is partly to blame for their current plight, but other factors are at play. Amid the hype, little attention is paid to the crucial difference between these nations’ public debt and their external debt.
• Debt held by a nation’s own citizens has less pernicious consequences (Scott 2010) – the interest paid is returned to the domestic economy.
• External debt, if used to finance non-productive expenditure, is a different matter. Non-residents receive the interest on such debt, making the nation poorer with every interest payment.
Table 1. Government debt, external debt, and Internal Investment Position at year-end 2009 Notes to Table 1: (a) IIP and net external data for Ireland excludes Ireland 's International Financial Service Center assets and liabilities; (b) General Government Gross debt and balance, as defined in the updates to Stability and Growth Programme. For remaining variables, IMF IIP and External debt manuals’ definitions are used; (c) Net external debt data is calculated by adding external debt-like securities liabilities by sector and subtracting asset claims on debt-like securities by sector. It excludes direct investment claims, financial derivatives claims, and reserves; (d) Proxy for non-government net external debt. Monetary Authority is included in this category to account for varying degrees of central bank lending
Ricardo Cabral
8 May 2010, VOX.EU
Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries ' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling.
Financial markets are focused on the public finances of Portugal, Ireland, Greece, and Spain (the “PIGS”). The PIGS´ public profligacy is partly to blame for their current plight, but other factors are at play. Amid the hype, little attention is paid to the crucial difference between these nations’ public debt and their external debt.
• Debt held by a nation’s own citizens has less pernicious consequences (Scott 2010) – the interest paid is returned to the domestic economy.
• External debt, if used to finance non-productive expenditure, is a different matter. Non-residents receive the interest on such debt, making the nation poorer with every interest payment.
Table 1. Government debt, external debt, and Internal Investment Position at year-end 2009 Notes to Table 1: (a) IIP and net external data for Ireland excludes Ireland 's International Financial Service Center assets and liabilities; (b) General Government Gross debt and balance, as defined in the updates to Stability and Growth Programme. For remaining variables, IMF IIP and External debt manuals’ definitions are used; (c) Net external debt data is calculated by adding external debt-like securities liabilities by sector and subtracting asset claims on debt-like securities by sector. It excludes direct investment claims, financial derivatives claims, and reserves; (d) Proxy for non-government net external debt. Monetary Authority is included in this category to account for varying degrees of central bank lending
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