In times of low yields and the prospect of rising yields, I asked myself if the european countries can ceteris-paribus cope with rising yields. Is there a way to calculate the effect of rising yields (ignore growth etc. for the time beeing), calculate a break-even yield where the debt burden becomes to much to cope. I thought about calculating the effect via government bond indices and the primary budget. Are there research papers about this?


There’s a huge literature on this topic. I would start by looking at the IMF Fiscal Monitor, and see what is interesting. Their research papers will refer to other papers that can be pursued. IMF Fiscal Monitor page.

Otherwise, you can search for papers on “fiscal sustainability.” As a disclaimer, I am not a fan of most the literature. This paper by Scott Fulwiler discusses interest rates and sustainability, and it critiques some of the technical issues in the literature - link to paper.

In any event, there is no “magic tipping point” for default. It is up to the government involved to decide at what point interest costs are excessive, and whether they will default rather than keep going. There have been almost no default of floating currency sovereigns, so there is no data set to work with. (Most sovereign defauits have occurred when they borrow in another currency; the euro area is discussed below.)

The euro area countries face a particular problem that is not really an issue for other developed countries: they do not have control of their domestic interest rates. Their debt may be issued at high spreads versus other euro interest rates, and so a default becomes a self-fulfilling prophecy (as seen in Greece). Most of the “fiscal sustainability” literature assumed that a country controls the interest rate it borrows at, so the situation is much less risky.

  • $\begingroup$ A breaking point need not mean a country default. If a country experiences unreasonable inflation, I believe the OP and most people would consider that a breaking point as well, think Zimbabwe. Think Spain, Italy, and Greece prior to joining the Euro. A sovereign country can avoid default, however, inflation is effectively a much worse, pseudo version of default. $\endgroup$ – Simeon Ikudabo Mar 16 '18 at 16:50
  • $\begingroup$ @SimeonIkudabo Although interesting, there’s no theory that links any particular level of the debt-to-GDP ratio to inflation. This is discussed within the fiscal sustainability literature. $\endgroup$ – Brian Romanchuk Mar 16 '18 at 20:59
  • $\begingroup$ Romanchuck I do agree that there is no theory that links a particular debt-to-gdp to inflation. I think that’s accurate. However, modern economics have shown (can provide sources) that increasing money supply at a rate that outpaces demand for the currency can lead to inflationary scenarios, even if default is adverted (MMT). I do agree that in terms of inflation, there’s no known tipping point. However, default does have a tipping point when tax receipts fall below the interest on debt payments/borrowing capacity. At that point you either print or default. $\endgroup$ – Simeon Ikudabo Mar 16 '18 at 21:33
  • $\begingroup$ @SimeonIkudabo There’s no developed country close to the situation where interest costs are near government revenue. If you looked at Japan, interest costs were about 1% of GDP - well below government revenues. In Europe, government revenues are generally large as a % of GDP, and that is what the question is about. Just multiply the debt % of GDP by the average interest rate, and compare that government revenue; IMF data are readily available. $\endgroup$ – Brian Romanchuk Mar 17 '18 at 2:14
  • $\begingroup$ In 2012 alone 23% of tax revenues went to pay the interest on the debt alone in Japan. Japan was 3% away from 100% of tax revenues being paid toward the national debt. However, investors were willing to buy bonds and substantially reduced rates. However, If rates had risen the braking point would’ve been at the point in time when 100% of tax revenues went toward interest expense. That’s nearing a game over scenario. As you can see, you can even calculate the yield in which this scenario occurs. $\endgroup$ – Simeon Ikudabo Mar 17 '18 at 8:02

I see various forms of a general question of trying to understand the government debt. To me it really seems nonsensical to think the gov is in debt. The gov issues money and is soul source of it. So if at any point the gov has a balanced budget, it printed it. So it's one in the same thing if budget paid or simply wiped away.

Now I consider the 1985 time frame where the gov issues bonds at high interest essentially a sink of m0 from the interest paid on the coupons. In the next 15 years or so we saw a rapid globalization and growth in world economy and use of dollar. A balanced budget or surplus was the result of the increased m0 with relation to relatively static or lagging tax rate.

So from this perspective provided there is an abundant and flourishing real economy where resource and value is ready and abundant, the gov budget is simply a vital tool in accounting for expenditures and prevention of financial corruption in the government and institutions which interface it. So these are the primary issues here.

Ultimately the issues are outside of money. Pertaining to the exchange of goods be it, college education and IP for cars and computers, labor. The dollar is just the fluid or coordinate system for measure, for these goods to be exchanged.

I think the real issues arent the gov deficit. That is merely a tax rate issue or even perhaps a money supply issue. Considering the technology we have today, the capabilities of the underlying real economy to produce goods and products should be healthy perhaps better off than ever before. It seems there are or must be very real political, social, and economic forces (maybe even monetary policy) choking or holding up trade. These could be due to environmental reasons, governance reasons, or basically we just want to go forward in a good direction and not some random one.

We need to consider what the future 10,20 years and beyond look like. We have near come up on the limits of Moore's law. The state of the art of physics and math really aren't to clear even to experts. Coming off exponential expansion could be turbulent and left with voids and pockets of retraction.

I think these are the real issues which already are shaping things. Again while the large gov debt makes financial responsibility less clear, I think it can be fixed with a tax plan, and money supply adjustments through the bond rates we've seen. The issue will be how to constrain these variables with a monetary policy that guards against uncertainty and flattening out of technological and scientific growth.

As for Europe, they have some what complimentary issues, guarding against inflation from a euro supply that up until a few years ago included Brittain in its design.


The break even point that I remember from the Japanese debt crisis was at the point that the interest on debt surpassed tax receipts. If there is a point at which you can calculate expected tax receipts and yearly interest on debt, that would be a breaking point. I’d also note (less precisely) That when the inflation rates surpasses the interest on debt for a period, that will also lead to higher yields making the issue worse, so inflation has to be a consideration in this analysis of WHEN the breaking point will come. For example, if inflation is excepted to be 4% in an EU country with massive debt in 2030, and a 4% yield would be more of a debt payment than projected tax receipts, that is a breaking point. The only two options are an inflation crises, or missing a debt payment.

  • $\begingroup$ What Japanese debt crisis? In any event, interest never surpassed receiptsin Japan; the Japanese Ministry of Finance includes debt maturities as part ot their definition of “debt service.” This was mis-interpreted by American financial market participants who were unable to read English documents produced by the MoF. $\endgroup$ – Brian Romanchuk Mar 16 '18 at 11:02
  • $\begingroup$ This is false, because in 2012 Japan DID have a debt crisis. Because of the “fear” that interest on debt would surpass receipts. Inflation also started to tick up during that period (albeit slowly), which added to the fear that rising yields would be self perpetuating as expectations of higher inflation would lead to higher yields. I can send you some links on the debt crisis because you missed that. $\endgroup$ – Simeon Ikudabo Mar 16 '18 at 16:46
  • $\begingroup$ zerohedge.com/contributed/… $\endgroup$ – Simeon Ikudabo Mar 16 '18 at 16:48
  • $\begingroup$ That article said “could” have a debt crisis. Sure, there were speculators running around saying that JGB yields would spike - and they lost money. Quickly scanning the data on FRED, the 10-year JGB yield was less than 1%. Nobody considers a 10-year yield less than 1% a “debt crisis.” $\endgroup$ – Brian Romanchuk Mar 16 '18 at 20:55
  • $\begingroup$ That’s not the point however, so it seems as if you’ve shifted goal posts a bit. The point is “where” would a breaking point again. And the reason as to why it was a crisis was because of the “fear”, not because it actually occurred yet. That’s why I believe you missed the point of the question which is “where” would a breaking point occur. Based on the Japanese situation we have an idea of “where” that breaking point would be and have not reached it. That was what I gathered from the OP’s question imho. $\endgroup$ – Simeon Ikudabo Mar 16 '18 at 21:27

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