December 03, 2012

We have focused on three very important indicators that can shed some light as to the debt capacity of an economy and debt service ability of an economy: the debt to GDP ratio, sovereign bond yields, and average tax rates. Using these indicators, we managed to combine them and use the product of the debt to GDP ratio with the ratio of sovereign bond yields to the economy-wide average tax rate as our proxy for an economy’s ability to service its debt and to stay below its debt capacity. This variable can then be used to evaluate whether the government is taking steps to structurally improve the debt to GDP ratio, government spending, and ability to avoid a financial crisis due to a country reaching its debt capacity or its inability to service its debt.

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