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# Debt-to-GDP Ratio

## What Is 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 (GDP).
• 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.
•  A study by the World Bank found that if the debt-to-GDP ratio of a country exceeds 77% for an extended period, it slows economic growth.
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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 a chief ideal in 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%.

In Q3 2021, the U.S. had a debt-to-GDP ratio of 122.6%. 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 for 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 September 2021) are as follows:

1. Japan: $1.3 trillion 2. China:$1 trillion
3. United Kingdom: $567 billion 4. Luxembourg:$312 billion
5. Ireland: $310 billion 6. Switzerland:$297 billion
7. Cayman Islands: $253 billion 8. Brazil:$249 billion
9. France: $242 billion 10. Taiwan:$240 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. Debt-to-GDP ratios above 77% for long periods of time correlate to slowdowns in economic growth, per a World Bank study.

## How Does Modern Monetary Theory (MMT) 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 the rising national debt.

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

As of December 2020, Venezuela had the highest debt-to-GDP ratio at 350%, up from its 2019 reading of 233%. This was likely due to the lack of oil demand brought on by the COVID-19 pandemic. Next was Japan, with a reading of 266%, a relatively modest rise from its prior year's reading of 238%. The U.S. was 12th with a debt-to-GDP ratio of 128%.

### Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
1. World Bank. "Finding the Tipping Point -- When Sovereign Debt Turns Bad." Accessed Dec. 8, 2021.

2. European Union. "European Central Bank." Accessed Dec. 8, 2021.

3. Federal Reserve Bank of St. Louis. "Federal Debt: Total Public Debt as Percent of Gross Domestic Product." Accessed Dec. 8, 2021.

4. Congressional Budget Office. "Federal Debt: A Primer." Accessed Dec. 8, 2021.

5. Scholars at Harvard. "Growth in a Time of Debt." Accessed Dec. 8, 2021.

6. Political Economy Research Institute, University of Massachusetts Amherst. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff?" Page 2. Accessed Dec. 8, 2021.

7. U.S. Department of the Treasury. "Major Foreign Holders of Treasury Securities." Accessed Dec. 8, 2021.

8. Trading Economics. "Country List Government Debt to GDP." Accessed Dec. 8, 2021.