Fractal mathematician Benoit Mandelbroit once told us that the coast of England is much longer than we think. From a distance, it appears to be a smooth curve. However, an increasingly closer look reveals countless coves, crannies, and indents that make it much longer.
Similarly, looking at sovereign debt, we might think it is just about countries borrowing money. But there is much more.
Debt is rising:
By selling different kinds of securities countries borrow money. They borrow that money from three groups of lenders. They borrow from banks, from private non-banks, and from official creditors.
- The banks in the first group can be domestic and foreign.
- The second group is varied and large. Taking us to all private investors that are not banks, the list includes hedge funds, corporations, and you and me.
- Different from the first two groups, the last one is official. It takes us to government agencies, central banks, and international agencies. It includes the government of China, the World Bank, and parts of the U.S. government like the Social Security Trust Fund.
Then, looking even closer, we see that lenders to the affluent developed countries, to nations with emerging markets, and to developing economies are somewhat different. The domestic nonbank lender slice of the AE and EM graphs are both their largest slices. However, moving down to the domestic banks, we see that they own a far larger proportion of the EM and DE sovereign debt than in the AEs.
Advanced Economies (AE)
Emerging Markets (EM) and Developing Countries (DC)
Our Bottom Line: U.S. Sovereign Debt Holders
In a U.S. Treasury list of the top 10 countries from whom the U.S. has borrowed money, Japan, China, and the U.K. are at the top for Group 3 (above).
My sources and more: Always handy for up-to-date research, my NBER Digest email alerted me to the sovereign debt paper. Then, if you want the default side of debt, This Time Is Different from Reinhart and Rogoff is excellent.
The prominence of Ireland and Luxembourg in the list of holders of US Treasuries mostly a result of income-switching tax dodges by US corporations (primarily pharma in the case of Ireland). The Cayman Islands are a place to park criminally hidden income; and it would be interesting to know how much of the UK share is specifically from the Channel Islands.