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A nation’s debt-to-GDP ratio compares what it owes to what it produces, and indicates its ability to repay debts.

The ratio provides investors with insight into a basic question: When is a country’s debt too high? A nation with a debt-to-GDP ratio of 100% has a total debt that equals its GDP.

Basically, the higher the ratio, the more likely a country is to default, which would scare investors and cause havoc in the markets. It can also spur higher interest rates. But there is no ideal debt-to-GDP ratio, and two nations with the same figure can see its meaning in different ways.

A nation may have a debt-to-GDP of 120%. If it makes its payments and continues to grow its economy, investors will still deem it to be stable. Many economies run with budget deficits. Another nation may also be at 120%, but if it does not make its payments, analysts will predict an economic collapse.

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