Perhaps you’ve seen it on Twitter or had it emailed to you, the New York Times’ fancy chart outlining “Europe’s Web of Debt”. Writing in the April 30 New York Times, before the EU had outlined its almost $1 trillion financial security package, Nelson Schwartz attempted to set out the relationship between the future of the euro and the Greece/PIIGS situation, using cross-border debt statistics. Complete with now-viral graphic by Bill Marsh, the point of the article was that the financial systems of all EU member states are so intertwined, that Greece’s fall would herald the likely collapse of the entire eurozone.
While an interesting use of data visualization, the problem with the graph is that it uses the wrong figures! It looks at all debt, no matter who took the debt out. (And even then, some of the figures aren’t that impressive: total lending by Greece to other PIIGS countries? $2bn.) For example, Nelson and Bill should have been concerned that their graphic showed Irish debt at almost the same level as Spain, a country ten times its size. If they’d divided the debt by population, they might have been a little suspicious to read that Ireland’s citizens apparently owe an average of over $500,000 each! Trust me, if the Irish government had debts of the guts of a trillion dollars, I’d be the first to be proclaiming the end times.
Because they didn’t look behind their statistics, however, the graphic is about as informative as CNBC’s now infamous unveiling of Ireland as the world’s most indebted country, with debts worth 1300% of GDP! The point that both miss is that you can’t look at debt liabilities without looking at corresponding assets.
That is why the markets are worried not about all debt. They are worried particularly about government debt, because typically there is no corresponding asset. And it turns out that there is a difference in scale between all debt and government debt – a huge difference in some cases. It turns out that, in the case of Greece and Italy, only about half of all debt is government debt. For Portugal and Spain, it’s only one fifth of all debt. In the case of Ireland, just five percent of all its debt is general government debt.
The reason is hardly a secret: Ireland is a major international financial services centre. The international financial services sector plays such a large role in the Irish economy that it even gets its own set of statistics from the Central Statistics Office. At the end of 2008, the sector had debts of almost €1,650bn. Don’t worry though – it also had assets worth about €1,660bn.
So, what might a revised “Web of Debt” look like? Taking the totals that the NYT used, attributed to the Bank for International Settlements, the graph below corrects them using the percentage of external debt that is government debt, according to the World Bank/BIS Quarterly external debt database. (Incidentally, a good indication of how inexact debt figures are is given by the fact that the World Bank/BIS figures give very different totals than the ones used by the NYT.) The partly-transparent larger circles are the NYT figures, the smaller circles are those figures scaled down to just public debt.
As you can see, the total debt figures exaggerate the situation for all countries, in particular Spain and Ireland, which have sizeable international finance sectors. A more useful statistic would have been to look at total government debt – or better yet total government debt per citizen. This ranges from $10,000 per head in Spain to $27,500 in Greece. Or – better still – take account of how the per capita debt compares to average output. Based on these figures, the ratio of (per capita) public debt to GDP in late 2009 was about 50% in Ireland and Italy, as low as 30% in Spain and above 90% in Greece.
The NY Times graphic was basically trying to be too clever. By looking for the smoking gun in the debt statistics across eurozone countries, it misses the much more obvious smoking gun: these countries are worried because they share a currency. And by trying to explain the UK’s concern at current developments through looking at its lending, the New York Times has missed the more obvious point that the UK is concerned not about its lending, but about its borrowing!