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History can have a nasty habit of repeating itself

Kitty Miv, Editor
04 April, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Debt – some have an aversion to it, others live their life by it. Either way, it is clear that debt makes the world go round, at least economically speaking (before all you astrophysicist start writing in!). Try running a successful business without a line of credit from a bank or other lender. Try buying a house without a mortgage (unless of course, you're one of the lucky few fortunate enough to be able to buy your home with hard cash). What's more, national tax codes tend to favor debt funding over equity funding, so it's hardly surprising that many businesses are highly leveraged.

However, as we experienced almost a decade ago – and are still experiencing now – debt can be a very bad thing if not managed responsibly, and unfortunately many banks, companies, and governments have been very irresponsible with how much debt is created in the recent past, with fatal consequences. Are we really expecting Greece, which has lost about one-third of the value of its economy through the debt crisis, to pay back all the money it has been lent by the troika of lenders? Let alone the debt it had already racked up before the crisis struck?

Yet, Greece isn't even the most indebted government. That dubious honor falls to Japan, the first of this week's subjects, which has sovereign debt equivalent to approximately 230 percent of GDP. That's a mind boggling amount. Despite its recent economic travails, Japan is still the world's third-largest economy, and GDP was estimated at over USD4.6 trillion in 2015. So that makes Japan's debt worth about JPY1 quadrillion. That's 15 zeroes. If you're struggling to comprehend that, in dollar terms it's USD10.5 trillion. Or to put it in a more easy-to-visualize way, it's roughly the same amount that China's entire economy produced in 2014.

Japan is more fortunate than Greece in that most of this debt is owed to domestic creditors, including financial institutions, insurers, companies, and individuals, at minuscule rates of interest, rather than to interfering foreigners wanting their pound of flesh (no names, no pack drill). Still does any politician seriously expect Japan to even make a dent in this debt mountain, let alone pay it down substantially, given its well-documented economic weaknesses and rapidly aging population? In public maybe they do, but in private I suspect they don't.

To be fair to the Japanese Government, there's little it really can do in the short- to medium-term to make a difference without snuffing out a fragile economic recovery. That's why I'm going to give it an encomium this week for continuing its policy of corporate tax cuts in the recently approved 2016 Budget. There really is no point in having such a high and complex corporate tax rate if the goal is to foster a private-sector recovery. And even if Prime Minister Shinzo Abe's three arrows of recovery haven't quite hit their mark yet, his policies are showing some signs of working.

The one cloud over a fairly good week for Japan is the interminable speculation about the second consumption tax rise, which is due to take place in a year's time. Abe has yet to decide whether the economy has recovered enough to withstand the likely fall in consumption that will follow the tax rise. But surely any impact on the economy is going to be short-lived, as it was with the first consumption tax rise in 2014. However, the decision is as much political as it is economic and will no doubt depend on Abe's political standing, which he is attempting to strengthen by seeking to hold lower house elections alongside a vote of the upper house later this year. Still, if I were a betting person I'd put money on another delay (although I wouldn't stake my mortgage on it).

The trouble with governments is that they tend to have short memories. This is especially the case in your average democracy, where the lifespan of a government is usually no more than a few years. This can mean that sometimes they fail to learn from history. And one of the latest countries that looks like it could be about to repeat a fatal economic policy error is Sweden, which intends to increase the banking sector's tax burden in the next Budget.

Now, I expect few people will have very much sympathy with the banks when they complain about being overtaxed, given that the industry has largely got away with financial and economic murder. But governments do have to be mindful that punishing the banks can have unintended consequences. Sweden's bankers are already warning that the proposal to abolish the interest deductibility of subordinated debt threatens to de-stabilize the country's banking sector.

I can imagine many people countering, "well, they would say that wouldn't they." However, it isn't necessarily just the bank tax measure that earns Sweden a rebuke this week. Finance Minister Magdalena Andersson told Bloomberg that both the bank tax measure and a financial activity tax (FAT) can "absolutely" be introduced together. It's not clear entirely what the government means by a financial activity tax, but it's been suggested that it could be a tax on banks' revenues. However, given Sweden's history of financial taxes, perhaps it might not be one of the Social Democrat/Green coalition's brightest ideas.

Born in 1967, Andersson was a mere teenager when Sweden's financial transactions tax was introduced in 1984. So she might not remember that trading in Swedish equities and other securities plummeted almost immediately after its introduction. Indeed, bond trading fell by 85 percent in the first week, and about 60 percent of the volume of Sweden's most actively traded shares decamped to London. The banking industry has already warned that the new FAT will cause an exodus of banks from Sweden, probably to London. Yes, they would say that wouldn't they. Nevertheless, global finance is no respecter of national boundaries, much more so now than in the 1980s. So perhaps Sweden should heed the warning. History can have a nasty habit of repeating itself.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

Japan the long game

Kitty's Execrations

Sweden short memories




Tags: Government | Debt | London | Banks

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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