In my last article I commented on Japan's coming debt time bomb (Massive Japanese Debt Monetization is Coming, Yen to be Devalued), in which I made the case that Japan had a tremendous amount of their debt maturing over the next three years and that the Bank of Japan was likely to monetize much of it and weaken the Yen as a result. Since then I've dug a bit deeper and taken a look at the top 10 debtor nations of the world to see if they too had a large portion of their total outstanding debt maturing in the near future. What I found startled me: Nearly 50% of the total outstanding debt of the world's top 10 debtor nations needs to be rolled over by the end of 2015.
While fears over a European contagion and a hard landing in China have driven investors into sovereign debt like the U.S. and Japan, how long can this continue and will investor demand for sovereign debt be able to soak up the total supply over the next few years? It is my belief that global central banks will be the buyers of last resort and will be monetizing the debt in massive quantities over the next two and half years. This may perhaps be the catalyst leading to the mania phase for gold as investors all over the world attempt to protect themselves from global quantitative easing and global currency debasement.
The Top 10 Debtor Nations
While the world is currently focused on Spain and Italy as seen by 5-year credit default swap insurance north of 500 basis points (costs $500K annually to protect $10M worth of debt from default), the picture for the other countries that make up the top 10 debtor nations in the world is not much brighter. For example, while Italy has a debt-to-GDP ratio of 120%, Japan takes the top spot with 208%; and while Italy currently has a budget deficit relative to GDP of -3.9%, the US is far worse with a -8.10%. In fact, of the top 10 debtor nations half of them have budget deficits of more than 5% relative to GDP and 7 of the 10 have debt-to-GDP ratios at or exceeding 80%. As the table below highlights, the sovereign debt crisis is not a Euro phenomenon but a GLOBAL issue. (Note: debt tables that follow include only debt held by the public, excluding inter-governmental holdings.)
The table below breaks out the total outstanding debt for the world's top 10 debtor nations and looks at how much comes due by year.
Looking at the total amount of debt tells only a part of the picture because it doesn't tell you how soon the sovereign debt mountain will become a problem. For that we need to see how much of it is coming due and how quickly that debt will be rolling over. What precipitated the US housing crisis was when adjustable-rate mortgages reset at higher rates beginning in 2005 and into 2008 as homeowners couldn't afford the higher payments. What I believe will precipitate the global sovereign debt crisis is not necessarily the debt resetting at higher interest rates, but debt maturing with not enough buyers to soak up the supply. This brings about two consequences: either higher interest rates and thus higher debt servicing costs or there is another option, which is central banks stepping in and monetizing the debt. The latter option has been going on now since 2008 and I believe it will be kicked into overdrive between now and 2015.
I believe global central banks will be monetizing debt in massive quantities between now and 2015 because large portions of debt will be maturing in just the next two and a half years. For example, both the US and Japan will see one fifth of their entire debt outstanding mature just between now and the end of the year, with Canada seeing 26% of their total outstanding debt mature! The other members of the top 10 are only in a slightly better position with all but the UK to see double-digit debt rollovers of their total outstanding debt between now and 2015.
The table below helps provide some idea of the magnitude of global sovereign debt maturing over the next few years by comparing the cumulative debt maturing relative to 2011 GDP. By the end of 2016, nearly 50% of the cumulative debt maturing for the top 10 debtor nations combined relative to their combined 2011 GDP will have to be rolled over.
Looking at the outstanding debt for the top 10 combined shows that just between now and the end of the year more than trillion in debt will mature, or 17% of their total outstanding debt, and by 2015 nearly 50% of the top 10 debtor nations total outstanding debt will come due. That is more than trillion in debt coming due in the next two and half years!
Because we are going to see trillions and trillions of sovereign debt come due over the next two and a half years I believe gold may be entering the mania phase of its secular bull market that began in 2001. There is just too much debt maturing over the next couple of years for capital markets to absorb and it is highly likely we will see global quantitative easing occur as central banks step in to be buyers of last resort to help suppress interest rates and keep debt servicing costs low. Over the next two years we will likely see the big 4 central banks combined reserves exceed trillion dollars.
Global currency debasement has been one of the main drivers for gold's appreciation and massive jumps in central bank balance sheets are also associated with kicking off big moves in gold. With the massive amount of debt to roll over just ahead and the likely increase in central bank balance sheets, we may just see gold head to new all-time highs as global investors move to protect their capital from the tidal wave of cheap money.