# Debt-to-GDP Ratio: Formula and What It Can Tell You

## What Is the Debt-to-GDP Ratio?

The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

### Key Takeaways

• The debt-to-GDP ratio is the ratio of a country's public debt to its gross domestic product.
• The debt-to-GDP ratio can also be interpreted as the number of years it would take to pay back debt if GDP was used for repayment.
• The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default, which could cause a financial panic in the domestic and international markets.
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## Formula and Calculation for the Debt-to-GDP Ratio

The debt-to-GDP ratio is calculated by the following formula:

\begin{aligned} &\text{Debt to GDP} = \frac{ \text{Total Debt of Country} }{ \text{Total GDP of Country} } \\ \end{aligned}

A country able to continue paying interest on its debt—without refinancing, and without hampering economic growth—is generally considered to be stable. A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called public debts), which are any balances owed to outside lenders. In such scenarios, creditors are apt to seek higher interest rates when lending.

Extravagantly high debt-to-GDP ratios may deter creditors from lending money altogether.

## What the Debt-to-GDP Ratio Can Tell You

When a country defaults on its debt, it often triggers financial panic in domestic and international markets alike. As a rule, the higher a country’s debt-to-GDP ratio climbs, the higher its risk of default becomes.

Although governments strive to lower their debt-to-GDP ratios, this can be difficult to achieve during periods of unrest, such as wartime or economic recession. In such challenging climates, governments tend to increase borrowing to stimulate growth and boost aggregate demand. This macroeconomic strategy is attributed to Keynesian economics.

Economists who adhere to modern monetary theory (MMT) argue that sovereign nations capable of printing their own money cannot ever go bankrupt, because they can simply produce more fiat currency to service debts; however, this rule does not apply to countries that do not control their monetary policies, such as European Union (EU) nations, who must rely on the European Central Bank (ECB) to issue euros.

### Good vs. Bad Debt-to-GDP Ratios

A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth. Pointedly, every percentage point of debt above this level costs countries 0.017 percentage points in economic growth. This phenomenon is even more pronounced in emerging markets, where each additional percentage point of debt over 64% annually slows growth by 0.02%.

### 120.23%

U.S. debt-to-GDP for Q3 2022—almost double early 2008 levels but down from the all-time high of 134.8% seen in Q2 2020.

The U.S. has had a debt-to-GDP of over 77% since Q1 2009. To put these figures into perspective, the U.S.’s highest debt-to-GDP ratio was previously 106% at the end of World War II, in 1946.

Debt levels gradually fell from their post-World War II peak, before plateauing between 31% and 40% in the 1970s—ultimately hitting a historic 23% low in 1974. Ratios have steadily risen since 1980 and then jumped sharply following 2007’s subprime housing crisis and the subsequent financial meltdown.

The landmark 2010 study entitled "Growth in a Time of Debt," conducted by Harvard economists Carmen Reinhart and Kenneth Rogoff, painted a gloomy picture of countries with high debt-to-GDP ratios; however, a 2013 review of the study identified coding errors, as well as the selective exclusion of data, which purportedly led Reinhart and Rogoff to make errant conclusions.

## Special Considerations

The U.S. government finances its debt by issuing U.S. Treasuries, which are widely considered to be the safest bonds on the market. The countries and regions with the 10 largest holdings of U.S. Treasuries (as of October 2022) are as follows:

1. Japan: $1.1 trillion 2. China, Mainland:$910 billion
3. United Kingdom: $639 billion 4. Belgium:$327 billion
5. Cayman Islands: $297 billion 6. Luxembourg:$296 billion
7. Switzerland: $263 billion 8. Ireland:$239 billion
9. Brazil: $225 billion 10. Taiwan:$216 billion

## What Is the Main Risk of a High Debt-to-GDP Ratio?

High debt-to-GDP ratios could be a key indicator of increased default risk for a country. Country defaults can trigger financial repercussions globally.

## How Does Modern Monetary Theory View National Debt?

Modern monetary theory (MMT) suggests sovereign countries do not need to rely on taxes or borrowing for spending since they can print as much as they need. Since their budgets are not constrained, such as the case with regular households, their policies are not shaped by fears of rising national debt.

## Which Countries Have the Highest Debt-to-GDP Ratios?

As of 2021, Japan had the highest general government debt-to-GDP ratio of the countries for which the IMF had available data at 262.5%. Next was Venezuela, with a reading of 240.5%. The U.S. was fifth with a debt-to-GDP ratio of 128%.

Article Sources
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1. Congressional Budget Office. "Federal Debt: A Primer."

2. European Union. "European Central Bank."

3. The World Bank. "Finding the Tipping Point -- When Sovereign Debt Turns Bad."

4. Federal Reserve Bank of St. Louis, FRED Economic Data. "Federal Debt: Total Public Debt as Percent of Gross Domestic Product."

5. Scholars at Harvard. "Growth in a Time of Debt."

6. Political Economy Research Institute, University of Massachusetts Amherst. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Page 1.

7. Treasury Direct. "About Treasury Marketable Securities."

8. U.S. Department of the Treasury. "Major Foreign Holders of Treasury Securities."

9. International Monetary Fund. "General Government Debt: Percent of GDP," Sort by Value.