Debt sustainability - this issue can again become important in the post-recovery period

Debt levels have exploded around the global. The growth has been most dramatic in developed countries like the US, but this debt explosion has been occurring across most countries. In the case of the US, the central bank has been a strong buyer of Treasuries, so the debt is not being held by private investors. Debt has been exchanged for reserves. There is a growing view through Modern Monetary Theory (MMT) that the monetizing debt is not a problem and if it becomes a problem through higher inflation, it can be solved through quick reversal of policies. 

Nevertheless, all countries may not be able to engage in the current debt policy extremes of the US nor may the US at some point. For most countries, debt sustainability will be an economic problem if certain extremes are reached. In the pre-MMT world there was a clear focus on debt through the strong arguments in This Time is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff. However, any current emphasis on austerity has been relegated to a policy closet. Still, it is important for investors to score countries on this critical issue and be aware that it can serve as a catalyst for market sell-offs in specific countries. 

Country debt sustainability can be measured through a scorecard. Here are some of the most commonly used factors for assessing debt vulnerability:

1. Debt/GDP - As the debt to GDP exceeds 100% there is greater likelihood of a slowdown in growth based on the cost of maintaining the debt.

2. Primary balance (government revenue - expenses and interest costs) - Sustained negative balances especially during periods of robust growth calls into question the ability to pay principle.

3. Interest rate versus GDP growth - When rates exceed GDP growth, the cost of debt will not be able to be maintained.

4. Weighted average maturity of debt - More short-term debt increases the risk of rolling over principle when the debt matures.

5. Interest/revenue ratio - An increasing ratio will mean that other government expenses will be crowded-out by interest payments.

These factors must be weighed against the governance of the country, policy uncertainty, and the overall demographics which affect ability to pay. The likelihood debt will be a problem is also affected by the financial stability of the country and the external imbalances current account imbalances and foreign indebtedness. 

While there may not be an immediate debt crisis, tracking country difference will pay-off. There are limits to country borrowing, and those limits, if reached, can lead to large currency declines, rising rates, and equity selloffs over a short time period.