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The sovereign debt crisis: why Greece, but not Japan?

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Abstract

This paper asks why Japan has not yet suffered from a sovereign debt crisis, although its gross public debt as a percentage of GDP is much higher than in Greece. We use a simple stylized model to explain the occurrence of both a fundamental and a speculative debt crisis. We apply this model to both countries and derive some hypotheses about why investors are still ready to hold Japanese Government Bonds. In particular, we point to the significance of domestic debt holdings, to the central bank’s government debt purchases, to investors’ access to “safe havens,” and to the role of an autonomous monetary policy. We also analyze potential challenges to Japan’s long-term fiscal situation, resulting from its aging population.

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Notes

  1. We concentrate on Greece, although a sovereign debt crisis in Europe also occurred in Ireland and Portugal. Italy and Spain and some smaller Eurozone member countries also showed some indicators of an upcoming crisis. The Irish case is special because the large government debt level resulted from a public bank bail-out and was a direct consequence of the subprime crisis. Spain and Italy also had to bail-out banks but to a less degree than Ireland, and budget deficits in these countries had other causes. See also IMF (2011b).

  2. Laeven and Valencia (2008, p. 56) count 63 sovereign debt crises between 1970 and 2007. In ten cases, they were also accompanied by banking and currency crises.

  3. In the case of Greece, the volume of trade on secondary markets for government bonds started to fall significantly before March 2010. See Website of Bank of Greece.

  4. Before, syndicated underwritings were also used.

  5. (i) Short term (3-month, 6-month, and 1-year Treasury Bills); (ii) medium term (2- and 5-year bonds); (iii) long term (10-year bonds); (iv) super long term (15-year floating rate, 20-year, 30-year, and 40-year bonds); (v) JGBs for individual investors (5- and 10-year); and (vi) inflation-indexed bonds (10-year). See Yoshino (2008).

  6. The bonds turnover ratio is a commonly used measure of bond market liquidity. The ratio shows the value of bonds traded in the secondary market relative to the amount of bonds outstanding. The higher the turnover ratio, the more active is the secondary market. In the case of Japan, the turnover ratio is 1.1 for Government bonds (and even less than 0.1 for corporate bonds). See website of Asian Bonds Online.

  7. Spain was an exception with a relatively stable gross debt ratio even after the outbreak of the subprime crisis. In the meantime, the Spanish debt ratio has increased significantly.

  8. Data before 2006 is not reliable due to “creative accounting” by the Greek authorities. More recent data was revised by Eurostat. Revisions cover the period 2006–2009.

  9. Improvements reached under the Trans-Pacific Partnership (TPP) agreement could potentially change this.

  10. If we interpret s as a risk measure, we dispense with the assumption of risk-neutral investors and have instead to assume risk-aversion. In this case, (R-s) may be interpreted as the certainty equivalent for risky returns from abroad. Alternatively, we can assume that domestic and foreign assets are imperfect substitutes, and take s as a measure for this imperfect substitutability.

  11. For an early study discussing the significance of such a home bias in securities holdings in Japan, see Kang and Stulz (1997).

  12. It is not clear, however, how much of these total government holdings of the ECB is related to Greek debt obligation. Hence, one also cannot tell how much government bonds the ECB holds as a percentage of Greek GDP.

  13. This is not saying that the BoJ, as an independent central bank, will automatically provide liquidity to the government. However, it is more likely for BoJ than for the Bank of Greece to prevent a debt crisis and a market melt-down.

  14. Canada is the only country with a sales tax rate comparable to Japan. Tax rates are currently 19 % in Germany, 17.5 % in the UK, and 23 % in Greece. Note that the overall size of the Japanese budget in relation to GDP is small compared with other OECD member countries. See OECD (2011).

  15. According to Sakuragawa and Hosono (2010) fiscal sustainability requires the Japanese government to run an annual primary budget surplus of at least 0.2 % of GDP (given a projected real growth rate of 2.5 %).

  16. Although Japan’s current account balance turned negative in 2012, the IMF (2013b) and the OECD (2013) expects that a surplus will reappear and widen in the coming 5 years.

  17. The decline in credit to nonfinancial corporations may also be attributable to demand factors.

  18. The difference is made up by increases in private households’ net financial assets.

  19. We thank a referee for pointing us to this argument.

  20. Austerity programs also exist in Ireland, Portugal, and Italy.

  21. In September 2012, ESFS was superseded by the European stability mechanism (ESM), which has the mandate to buy sovereign debt obligations from secondary markets.

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Acknowledgment

The authors like to thank two anonymous referees and Michael Diemer, Maik Pradel, and Daniel Willam for very helpful comments. The usual disclaimer applies. Research assistance by Linda Zimmermann, Mathias Ortleb and Oliver Janke and proofreading by Stuart Gregory is also acknowledged. This research was done while Uwe Vollmer was on leave at Keio University. He wants to thank Keio University for its support.

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Authors and Affiliations

  1. Department of Economics, Keio University, Mita 2-15-45 Minato-ku, Tokyo, Japan, 108-8345

    Naoyuki Yoshino

  2. Economics Department, Institute for Theoretical Economics, University of Leipzig, Grimmaische Straße 12, 04109, Leipzig, Germany

    Uwe Vollmer

  3. Asian Development Bank Institute (ADBI), Tokyo, Japan

    Naoyuki Yoshino

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  1. Naoyuki Yoshino
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  2. Uwe Vollmer
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Correspondence to Uwe Vollmer.

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Yoshino, N., Vollmer, U. The sovereign debt crisis: why Greece, but not Japan?. Asia Eur J 12, 325–344 (2014). https://doi.org/10.1007/s10308-014-0387-5

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