2011 will hopefully go down as the year the United States
finally tackles its imposing budget problems. The arguing has just
begun, but by the end of the year, Washington will likely have
agreed to some combination of deeper budget cuts and higher taxes.
I mentioned before
, inaction is no longer an
Yet in a number of other nations, inaction remains the norm. And
because of the rising imbalance between taxing and spending, the
International Monetary Fund (
has come out with a forecast of which countries may be in a deep
hole by 2015 if they don't act now.
But first you should know that not all countries have similar
bearings on your portfolio. Yes, the larger the
, the greater the chance a train wreck will derail the global
economy. But that's not the whole picture. Economic size counts,
but it's really about the relative wealth of a country on a
per-capita basis. Countries like India and Indonesia may be among
the world's 15 largest economies, but their citizens have little
extra income to purchase the goods and services that drive
international trade. Therefore, economic problems at countries with
low per-capita income won't be nearly as devastating as economic
setbacks among wealthier nations.
To put things in context, here's a list of the top 20 global
economies, according to the CIA's
The World Factbook
, and where each one is ranked according to per-capita income.
Looked at another way, the following countries score in the top 60,
according to both measures:
A major economic crisis in any of these countries would certainly
affect a wide range of trading partners. Moreover, these countries
have sophisticated banking systems, which have made many loans
outside their borders -- so any financial contagion would easily
The clock is ticking…
As noted, the
has been focusing on the growing fiscal imbalances currently taking
place in many countries. They've looked out over the next five
years, and even afteraccounting for all of the recent
belt-tightening measures, IMF economists are still quite alarmed.
They've cited 15 major economies that will carry a debt-to-GDP
ratio of at least 75% by 2015. The list is led by Japan, which must
gear up for a major bout of spending to help rebuild the economy
after the recent earthquake and tsunami. Here's the IMF list.
The implications of these runaway budgets are pretty clear.
Let's do the math on when a country carries debt that's the same
size as its
. A typical government accounts for anywhere from 17% to 23 % of
total social spending. This debt-to-GDP ratio means the country
will carry $1 trillion in debt by 2015. So in a $1-trillion
economy, a government taxes its population at about $170 billion to
$230 billion. Yet the interest on existing debt alone would be
about $50 billion, or around 20-25% of the budget, if you assume 5%
interest rates. As we're seeing in places like Greece, lenders are
requiring a higher
. An 8% interest rate means $80 billion in interest or closer to
one-third of all government spending. That's $80 billion less the
government has to spend on other areas such as health, education
and defense. For a country like Japan, where debt is projected to
be 250% of GDP by 2015, any meaningful spike in interest rates
would simply wipe out the country.
To close deficits, governments will need to cut spending and raise
taxes much more aggressively, which would add another drag on
already-struggling economies. To actually lower those debt-to-GDP
ratios, governments need to not only shrink their
, they need to reverse it into surplus. And to do that, any
government will have to actually pull more out of an economy than
it puts in.
This all sounds so scary, and it is. Most of these nations have
recognized the disturbing depth of the problem. But none has taken
a strong enough action to alter the course. For example, Greece,
Ireland and the United Kingdom have all enacted seemingly radical
measures to bring down debt levels, yet the IMF still sees debt as
a percentage of GDP rising in each of those countries for each the
next five years. These countries feel they've done all they can
without inciting riots. It's still not enough...
To be sure, the world is also filled with fiscally-responsible
governments. Hong Kong, Saudi Arabia, Chile and China all look set
to have debt-to-GDP ratios below 10% in 2015. For that matter,
Australia, South Korea, Sweden, Colombia and Turkey look to be on
relatively healthy footing, even if they have to do some
belt-tightening of their own in coming years. But belt-tightening
is not necessarily the only action to take. Although tax hikes are
anathema in the United States, many of these just-cited countries
appear to have struck a balance between too much and too little
government. Their tax structures are not overly burdensome, which
explains why most are able to post respectable economic growth
rates (with the exception of Saudi Arabia, which is propped up by
Action to Take -->
Unless you're an eternal optimist, you need to seriously reconsider
any investments you have in places like Japan and, for that matter,
almost all of Europe. These countries' stock markets could
represent great buys -- only after their governments have shown
meaningful progress on debt reduction. In contrast, more nimble,
fiscally-balanced countries, such as Indonesia, Turkey, Columbia
and Australia, appear much better-positioned to withstand the
coming global financial problems. Luckily, each of these countries
has at least one
exchange-traded fund (
tracking it. I mention some of my favorite picks in this article,
but you should do your own research before committing to one.
-- David Sterman
P.S. -- We've just identified six surprising events that could
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.