As the world attempts to emerge from the global financial crisis, much has been said of the nations that are left with major debts. While several countries’ names are often repeated, exactly which countries are the most indebted? We investigate the major economies of the world to see which debts are proportionally high, as compared to each country’s GDP. So long as businesses and individuals continue to run on deficits, debt collection will continue to be an important service.

Ireland
Ireland is a member of a club no-one wants to be in. It is one of the PIIGS. This acronym stands for several European Union member countries that have been deemed to have weak economies and large debt loads. The countries are Portugal, Italy, Ireland, Greece and Spain.

Ireland has the ignominy of being the country with the highest external debt, that is, the highest foreign liabilities in the world as a percentage of its Gross Domestic Product (GDP). GDP measures a country’s total economic output. By comparing GDP to a nation’s external debt, one gets an idea of the ability of a nation to manage such debts.

Ireland’s external debt is an outrageous 13 times it’s annual GDP, or expressed as a percentage, an incredible 1300%. That’s well over half a million US dollars of debt for every Irish man, woman and child! Ireland’s problems stem to a large part from a property bubble that has now burst. Irish banks lent heavily to property developers who attempted to sell land at overinflated prices; prices which have now collapsed. Property developers are teetering on insolvency, and struggling to repay loans. Banks have been left with these large bad debts, leading to nationalisation of one Irish bank. This in turn has further indebted the government.

United Kingdom
At number two, and also in deep external debt trouble is the United Kingdom. External debt runs at over four times annual GDP, or around US$150,000 per UK citizen.

Switzerland
Rounding out the top three is Switzerland, with a similar amount of external debt per capita as the UK, but with a lower total of 3.8 times annual GDP.

The United States Of America
There has been plenty of talk about large debt levels in the world’s biggest economy. Many have also pointed the finger at the US for having helped create the global financial crisis through lax lending policies to uncredit-worthy American home buyers, leading to an inflated property bubble that eventually burst. One would think that the USA must surely be somewhere near the top of the list? Interestingly, the USA only comes in at number 20, with external debt essentially matching annual GDP (i.e. 100%). While this is high, the countries highlighted above are arguably in substantially worse predicaments.

The Global Financial Crisis caught many countries unawares. Some may have believed that easy credit would continue indefinitely. With slumping demand, fearful consumers and rising unemployment, many nations attempted to spend their way out of trouble. This debt financed spending attempted to stimulate economies, but has left major debts for future taxpayers, meaning there will be plenty of pain to come. The private sector in the above countries have also spent beyond their now reduced means, meaning that debt recovery will become an important service in chasing those than cannot manage their debts.

After having exited recession only recently, the UK is now ‘on the road to recovery’ – a different story entirely to the one in the US, where the recession ‘unofficially’ ended in the third quarter of last year.

So, with both economies returning to growth, it’s time to take a look back and pick out what actually happened… was the recession in the UK that different to the recession in the US?

Well, to start off with, the US was only in recession for four consecutive quarters (12 months) – which is better than Britain, which remained in recession for a further two consecutive quarters (so 18 months in total), meaning the UK economy was the last major economy to come out of recession (behind Japan, China, France and Germany).

It all started for the US economy when economic growth fell by 0.3% during the third quarter of 2008 – after increasing by 2.8% during the previous three-month period. While for the UK, the economic heartache began when gross domestic product (GDP) fell by 1.5% during the final quarter of 2008. 

Fast forward several quarters of economic uncertainty, and…

In the third quarter of 2009, the US economy posted a better-than-expected annualized growth rate of 3.5% – marking the first positive quarter since Q2 2008. Meanwhile, in the final quarter of 2009, the UK economy posted a weaker-than-expected growth of 0.1% – barely making it out of recession.

Despite the weak economic growth in the UK, Chancellor of the Exchequer Alistair Darling said he was confident that the UK is now “on a path to recovery”.

Over the course of 2009, residents of both countries felt the effects of the recession. In the UK, for example, the number of people declared insolvent reached an eye-watering 134,142 – this was made up of 74,670 bankruptcies, 47,641 IVAs (Individual Voluntary Arrangements)* and 11,831 DROs (Debt Relief Orders)**. While in the US, up until the 30^th September 2009, there were 1,402,816 filings for bankruptcy – this figure included 989,227 chapter 7 filings, 14,745 chapter 11 filings, 487 chapter 12 filings and 398,210 chapter 13 filings.

*An IVA is an alternative to bankruptcy, offering borrowers the chance to clear unmanageable unsecured debts in five years, and have the debt they can’t afford to repay written off.

** A DRO is also an alternative to bankruptcy, and was introduced on April 6^th 2009. It is designed to help people who have very few assets and debts of less than £15,000.

So, now both economies are ‘officially’ out of recession, can we expect things to stay this way?

Although it is hard to predict what may lie ahead for both economies, many experts are expecting a slow recovery from the two countries. This isn’t to say that they won’t dip back into recession though, which is always a possibility when economic growth, particularly in the UK, has been so weak