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

The debt-to-GDP ratio is the ratio of 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 indicates its 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.

Economists have not agreed to a specific debt-to-GDP ratio as being ideal, and instead, typically focus on the sustainability of certain debt levels. If a country can continue to pay interest on its debt without refinancing or harming economic growth, it is generally considered to be stable. A high debt-to-GDP ratio may make it more difficult for a country to pay external debts and may lead creditors to seek higher interest rates when lending.

### The Formula for the Debt-to-GDP Ratio Is

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

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### What Does the Debt-to-GDP Ratio Tell You?

If a country is unable to pay its debt, it defaults, which could cause a financial panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default. While governments may strive to have low debt-to-GDP ratios, government borrowing may increase in times of war or recession in order to stimulate growth and aggregate demand; this is a macroeconomic strategy attributed to Keynesian economics.

Some economists—for example, those who adhere to modern monetary theory (MMT)—argue that a sovereign nation that is able to print its own money can never go bankrupt because it can always produce more fiat currency in order to service debts. However, this rule does not apply if a country does not control its own monetary policy (such as EU members who rely on the ECB to issue euros) or countries that hold large amounts of foreign-denominated debts, such as Argentina, which defaulted on U.S.-dollar denominated government bonds.

A study by the World Bank found that if the debt-to-GDP ratio of a country exceeds 77% for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 1.7 percent in economic growth. It's even more pronounced for emerging markets. There, each additional percentage point of debt above 64 percent will slow growth by 2 percent each year.

### Key Takeaways

• The debt-to-GDP ratio is the ratio of a country's public debt to its gross domestic product (GDP).
• If a country is unable to pay its debt, it defaults, which could cause a financial panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default.
•  A study by the World Bank found that if the debt-to-GDP ratio of a country exceeds 77% for an extended period of time, it slows economic growth.

### Debt-to-GDP Patterns in the United States

The United States had a debt-to-GDP ratio of 104.17% in the year 2015 and 105.4% in 2017, according to the U.S. Bureau of Public Debt. The U.S. experienced its highest debt-to-GDP ratio in 1946 at 121.7% at the end of World War II, and its lowest in 1974 at 31.7%. Debt levels gradually fell from their post-World War II peak before plateauing between 31% and 40% in the 1970s. They have been rising steadily since 1980, jumping sharply following the subprime housing crisis of 2007 and subsequent financial meltdown.

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

• Taiwan at $182.3 billion • Hong Kong at$200.3 billion
• Luxembourg at $221.3 billion • The United Kingdom at$227.6 billion
• Switzerland at $230 billion • Ireland at$264.3 billion
• Brazil at $246.4 billion • The Cayman Islands at$265 billion
• Japan at $1.147 trillion • Mainland China at$1.244 trillion

### Global Debt-to-GDP Ratios

The average debt-to-GDP ratio among Organisation for Economic Co-operation and Development (OECD) countries in 2015 was expected to be 111.2%. A number of countries had debt-to-GDP ratios in 2015 that were more than 100%, including:

• Belgium at 105.4%
• France at 116.1%
• Greece at 188.2%
• Ireland at 132%
• Italy at 147.4%
• Japan at 232.5%
• Portugal at 142.2%
• Spain at 111.5%
• The United Kingdom at 103.1%

### Limitations of Debt-to-GDP

The landmark study "Growth in a Time of Debt," by Harvard economists Carmen Reinhart and Kenneth Rogoff, painted a gloomy picture for countries that have high debt-to-GDP ratios. However, in 2013, a graduate student reviewed the data for that influential study and found that coding errors and selective exclusion of data led Reinhart and Rogoff to make incorrect conclusions. Correcting these basic computational errors undermined the central claim that too much debt causes a recession. Reinhart and Rogoff still maintain that their conclusions are nonetheless valid.