Sovereign Debt and Deficit by Country

Unobtanium

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Sovereign Debt and Deficit by Country
http://www.forbes.com/sites/davidmarotta/2012/02/10/sovereign-debt-and-deficit-by-country/

In Freedom Investing 2012 I analyzed the latest Index of Economic Freedom from The Heritage Foundation. Here I present some simple analysis of sovereign debt and deficit by country using data from the Heritage Foundation.

The economic freedom raw data from the Heritage Foundation included the following three statistics for each country:

1.Tax Burden as a percentage of Gross Domestic Product (GDP).
2.Government Expenditure as a percentage of GDP.
3.Public debt as a percentage of GDP.

From these I computed a country’s deficit (4) as a percentage of GDP by taking the Tax Burden (1) minus the Government Expenditure (2). There are subtler ways of evaluating debt and deficit as some countries have rainy-day funds while other just use a rainy day as an excuse toward even more wanton spending.

Then I plotted each country’s debt (3) and deficit (4) on the following chart:



In March 2010 Bill Grosses drew a similar chart in his newsletter in which he circled the “Ring of Fire” countries to be worried about. We warned to avoid these “ring of fire” countries. And a year later revisited that advice confirming that investors should continue to avoid the “ring of fire.” Now almost a second year later we reiterate that sovereign debt and deficit produces a drag on a country’s economic prospects. Low debt and deficit continues to be one of the important components of economic freedom.

Most investors have heard of the BRIC emerging market countries (Brazil, Russia, India, China). What is important in the Ring of Fire are the PIIGS (Portugal, Ireland, Italy, Greece and Spain) pulling down the European Union. Add to these countries Japan, The United States, and the United Kingdom.

Sovereign debt and deficit weigh most heavily on a country’s level of government spending, one of the ten components of freedom in the Heritage Foundation economic freedom study. Here is a graph showing the freedom scores for government spending in Europe.

There are probably multiple reasons why high economic freedom is important to the investment returns of companies in a country, but sovereign debt and deficit is certainly one of them.
 

pmbug

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But debt is money! /Keynesian economist

That's a good chart. Looks like a debt bubble. /deadpan
 

bushi

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...and the long-term indicator should be rather %deficit, than %debt: Don't overlook the fact that 20% deficit will make additional 100% debt in as short as five years, in stalled/floundering GDP growth scenario. Which is at least "quite possible", for troubled countries.

....GO Greece & Ireland!
 

rblong2us

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apparently most of the UK Pols dont know the difference between the debt and the defecit and those that do, prefer not to discuss the debt, cos its a scary big number and its much easier to talk about cutting back the deficit ..........

There really is no hope of a solution the way things are currently structured.
 

DoChenRollingBearing

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All of these topics today have all been very scary! I think I will start buying 18 karat jewelry in Peru every time I go there now. Put it on my credit card, but leave it there.

Another good one Unobtanium.
 

ancona

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Wow! I just read a lot more scary shit over at ZH. Apparently Iran is shadowing our carrier in the Gulf with some remote control drone boats. They are poking the big guy with a stick, and I suspect it won't end well.
 

swissaustrian

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The numbers for Switzerland's budget in the chart for 2010 are wrong. We've had a small surplus, not a deficit.
 

Unobtanium

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Well Swissaustrian, Switzerland once again stands apart in the chart shown in the article below.

SWITZERLAND UNDER SIEGE - WHY PRIVACY STILL EXISTS AND STILL MATTERS
by Frank R. Suess
http://www.mountainvision.com/newsletter.php?view=3988c7f88e

The long-established and noble rule of Law, one of the greatest products of the character and tradition of British history, has suffered a deadly blow. Blackmail has become respectable.
~ Robert G. Menzies

Dear Mountaineers,

Switzerland and its banks have been in the news a lot over the past few years. Lately, it has gotten even worse. Living in Switzerland and running a company in the wealth management ‘arena´ (emphasis added), does at times feel as if Switzerland were under siege.

The latest attacks by the US Justice Department, which ultimately resulted in the breakup of Wegelin, the oldest private bank of Switzerland, do create a considerable level of aggravation. I will refrain from commenting on the details of the Wegelin situation, or the general and dubious assault on Swiss banks here. However, I do want to emphasize the following fact to our international readers and clients: Banking secrecy was not founded on the premise of tax evasion. And, privacy is NOT illegal!

Swiss Banks, and Switzerland, in the Crosshairs of America
The Wegelin story is one that raises many questions. Some are related to the power of the media. Some relate to the rule of law. How far are bankrupt countries allowed to go in their pursuit of tax revenue?

Nothing has been proven and no one has gone to court. Nevertheless, a solid private bank like Wegelin, founded in 1741, can be driven to the point of surrender by the mere announcement of lawsuits, investigations, IRS penalties and criminal charges, and without a court ruling or proof of crime. Furthermore, the US froze Wegelin´s US dollar remittances in the US. Few international banks can live without the capacity of making and receiving USD-denominated payments. Many of Wegelin´s institutional clients, out of fear of frozen USD assets, or out of concern that they would be left out of USD foreign exchange transactions, were leaving the bank in droves.

In response, Wegelin decided to split off the non-US business and sold that part of Wegelin to Raiffeisen Group. US clients remain in Wegelin. Their names are not being handed over to the US. Wegelin is going to fight in court. Hopefully, rule of law will exist there, in the realm of US courts. We shall see.

But there are other questions that are hard to neglect: Is this really about tax dodgers? Is this really about fighting crime? Or, are their other agendas?


Source: AMECO database, UBS WMR

The diagram above depicts the long-term solvency positions of European countries. It is easy to recognize that Luxembourg and Switzerland stand apart from the rest. Frankly, I expect that as long as the debt and deficits in the countries around Switzerland, in America and the UK, continue to grow, the pressure on Switzerland will continue to grow as well.

Switzerland, in 2011, has again had a budget and trade surplus. Switzerland allows its people a say in political decisions via its system of direct democracy. It stands for sovereignty, for independence, for freedom, and for privacy. Switzerland, in the midst of insolvent OECD countries, in the midst of social unrest and unprecedented debt elsewhere, stands out like a sore thumb.

The Essence of Privacy
Anyone who understands anything about wealth preservation and asset protection also understands the importance of privacy. It is primarily privacy that protects you from the intrusions of frivolous lawsuits, greedy attorneys and other predators. Asset protection laws and structures are only the second line of defense. A good asset protection plan should aim at first avoiding, or at least minimizing, exposure and visibility.

What this DOES NOT mean is that you must break any laws. To the contrary, we recommend doing your offshore planning compliantly. However, in reading the newspapers, one could come to the conclusion that privacy is criminal. It is not. Governments around the world are running into fiscal problems, particularly the governments of Germany, the United Kingdom and America. Thus, they are setting off on an aggressive hunt for tax money, increasingly employing methods that are at the limit, if not beyond, legality.

When your government acts ‘above the law´, it is time for serious planning. In the absence of rule of law, the most fundamental prerequisite of a functioning free country is undermined. At that stage, protecting your freedom and your property within that country becomes a gamble. Privacy and property are in jeopardy and need to be protected OUTSIDE of your country.

Key Principles of Offshore Privacy
This is the point where you enter the realm of offshore (i.e. international) wealth management and tax planning. A few principles in this context must be understood by all of our Mountaineers, no matter which jurisdiction they come from:

• Safekeeping and investing assets offshore - in other words, outside of the borders of your country - per se is NOT illegal. What may be required though is regular reporting of those assets, depending on where and how your assets are deposited and managed abroad. Not declaring assets held overseas is what can get you into trouble.
• Making ‘offshore´ (i.e. international) arrangements for the deposit and management of your assets does not mean that you can thereby leave the tax rules of your country of residence behind. They will generally apply elsewhere, too. Therefore, one should aim at implementing an offshore plan that achieves asset protection and privacy in compliance with the rules of one´s country of residence.
• The purpose of privacy is to protect the well-being and fortune of you and your family. Privacy does not necessarily require a numbered account though. It starts with your going about your affairs ‘quietly´, particularly in jurisdictions with a high level of litigation. It is important to keep a low profile if interested in avoiding unnecessary risk exposure.
• Privacy amongst tax authorities within a country that is fiscally bankrupt will generally not exist. Countries like those mentioned earlier have given up such privacy protection long ago. Banks, accountants, and other financial professionals have, to a large degree, become tax agents. The transparent citizen has become the norm. This has become a fact of life already, or will be the common denominator across indebted countries in the near future.

Can Americans Still Own Swiss Bank Accounts?
The answer is a clear and simple yes. Don´t let anyone tell you otherwise. Nevertheless, the question is justified. In fact, and unfortunately, I know of several additional Swiss banks that have now decided to no longer accept American clients. Some of them will even send American clients away, whether those clients declared their account in their tax returns or not.

However, there are several good banks, asset managers and insurance companies that do accept American clients. As part of that group, we at BFI Wealth Management work with American clients, and will continue to do so. We help Americans open bank accounts. We manage their assets. And, we help them diversify their wealth internationally.

The reasons for our clients to work with us? Their primary objectives are safety, wealth preservation, and risk management - all kinds of risks.

Sincerely,
Your "Swiss Mountain Guide"

Frank R. Suess
 
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