by Calculated Risk on 7/08/2010 11:02:00 AM

CR Note: Reader "some investor guy" has put together some data on sovereign default risk. This is the first in a series of posts.

Debt issued by governments worldwide is immense. According to the Bank for International Settlements, at year end 2009 worldwide sovereign debt exceeded $34 trillion, and is greater than the amount of corporate bonds outstanding.

Japan and the US dwarf most other borrowers. Together they have about half of all sovereign debt worldwide. Still, 23 other countries have over $100 billion of debt outstanding. The other 100+ countries worldwide have a total debt of about $1.4 trillion.

Click on graph for larger image in new window.

Note: This graph shows the sovereign debt in December 2007 and December 2009.

Due to the recession and increased expenditures to rescue banking systems, total sovereign debts grew by almost 30% in just two years. Sovereigns became the majority of worldwide debt. Several countries doubled their debts from 2007 to 2009 (BIS data).

Source: Bank for International Settlements (BIS)

*For the US, figures include public holdings of Treasuries, but not Fannie Mae or Freddie Mac (about $8.1 trillion year end 2009, per BIS), or the “intragovernmental holdings” of Social Security, Medicare, the Civil Service Retirement Fund, etc. (about $4.5 trillion year end 2009, per US Bureau of Public Debt).

When shown as a percent of GDP, the picture looks a bit different. Japan and Italy have both a large amount of debt in absolute terms, and as a % of GDP.

The United States has a more moderate debt as a % of GDP.

The third graph shows the size of sovereign debt compared to equities and other bonds.

Because of its immense size, sovereign debt is one of the largest risks to the global financial system. There are many linkages to sovereign debt, including interest rates, exchange rates, bank debt, and credit default swaps. Many of the potential problems and risks are surprising, even to those well-versed in their particular area of finance.

CR Note: This is from "Some investor guy". Over the next couple of weeks, some investor guy will address several questions: How often have sovereign countries defaulted in the past? What are market estimates of the probabilities of default? What are total estimated losses on sovereign bonds due to default? What happens if things go really badly and what are the indirect effects of default?

Part 2 will be posted on Saturday: How often have sovereign countries defaulted in the past?

Series:
• Part 1: How Large is the Outstanding Value of Sovereign Bonds?

• Part 2. How Often Have Sovereign Countries Defaulted in the Past?

• Part 2B: More on Historic Sovereign Default Research

• Part 3. What are the Market Estimates of the Probabilities of Default?

• Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

• Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

• Part 5B. Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange

• Part 5C. Some Policy Options, Good and Bad

• Part 5D. European Banks, What if Things Go Really Badly?