# Which Rich Country Goes Bankrupt First?

Channel: OBF
Video: https://www.youtube.com/watch?v=zhQVjly5Gos
Duration: 18 min
Language: English
Words: 3046
Transcript page: https://viewrankai.com/tools/youtube-transcript/zhQVjly5Gos

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[0:00] These are the G7, seven of the biggest rich economies, and one of them is first in line to go bankrupt. Now, on paper, the case against some of them looks obvious. Japan owes the most for its size, America borrows the fastest, Britain pays the highest rate of all, but the most obvious aspect is Japan with its enormous debt. Japan's government debt is sitting at a cool 204% of its entire economy, the heaviest load in the rich world. So, naturally, you would expect Japan to pay the highest interest rate of the seven, but here's the strange part. It pays the lowest,

[0:39] about 3%. So, how is that possible? Well, it comes down to who Japan actually owes the money to. When a government needs money, it borrows by selling bonds. A bond is basically an IOU. Only about 8% of Japan's government bonds are held by foreigners. The rest sits inside Japan with Japanese banks, insurers, and pension funds. And the biggest holder of all with almost half is the Bank of Japan. That's the government's own central bank, the institution that creates the yen. That's what saves Japan. Every government on this list pays off its old loans by taking out new ones. So, for a country, going bankrupt is the moment the lenders

[1:23] walk away like they did with Greece in 2015. But Japan's biggest lender creates the yen. It can always buy more, and no outside lender can cut Japan off. That's the first of three rules I'm going to clear these seven countries with. The rule is, who do you owe? Japan mostly owes itself, so Japan is cleared. One down. There is still a bill, though, and it shows up in the currency. In July 2026, the yen hit its weakest level against the dollar since 1986. So, everyone who saves in yen pays that bill a little every year. That's the price Japan pays for being cleared. But remember one thing about Japan, Japanese

[2:03] investors hold a lot of bonds from one of the other six countries. And in 2024, they sold more of that country's government debt than they bought. I'll tell you which country when we get to it. For now, we have America. And this is what America paid in interest on its debt in the budget year that just ended, 1.14 trillion dollars. That's more than it spent on Medicare or its entire military. Put another way, $1 in every five the government collects goes straight back out as interest. That sounds like a country in serious trouble, but actually America is cleared, too. This time it's because of

[2:43] rule two, which currency do you owe? America owes dollars and America's central bank creates dollars. The Federal Reserve Bank of St. Louis once put it pretty bluntly, as the sole manufacturer of dollars, the US government can never become insolvent. Insolvent just means unable to pay its bills. Now, compare that to Greece. Greece owed euros and Greece had no way to create euros, so when the rescue money stopped in 2015, the banks ran short of cash within days. So, a country that owes its own currency can always find the money as long as its central bank is willing to create it. The price for this is that the currency, of

[3:22] course, loses value the way the Yen has, but there is one catch [music] here. That rule only works as long as America is allowed to keep borrowing. So, the only way America runs out of dollars is if it chooses to. See, America has a legal cap on its own debt. I live in Denmark and we actually have one, too, but ours is set at more than three times what we owe currently, so nobody ever thinks about it. America's cap is a lot tighter. Its debt passed 40 trillion dollars in August 2026 and the cap is 41.1 trillion. So, in October 2026, there was about 1 trillion of room left

[3:59] under it and America borrows $2 trillion a year, so that means it hits the cap in about 2027. Now, the Treasury can shuffle money around for 6 to 9 months after that, but if Congress still refuses to lift it, the one country that can always pay stops paying, which is wild. Remember that year though, 2027, because it ends up mattering a lot by the end of this video. There's also one more thing you should know about America. Whenever the world panics, money usually runs into American government bonds because they're seen as the safest place to hide. That's what happened in the last Euro crisis. This time the money went somewhere else and

[4:37] I'll show you where at the end. Next up is Germany and by the two rules so far, Germany should actually be quite nervous. Half of its debt is held abroad, so it fails rule one and it borrows in Euros, which it has no power to create, so it fails rule two as well, but I'm still going to clear it and here's why. This is Germany's debt, about 65% of its economy. Every other country in this lineup is above 100 and

[5:04] that low number is what saves Germany. The rules only start to matter once lenders begin to doubt you and Germany gives them nothing to doubt. It holds the top credit rating there is and in the first days of October 2026, as money left French bonds, it went straight into German ones. Now, Germany is spending that [music] advantage. In March 2025, it rewrote its constitutional debt limit in a single week and this year its budget gap is on course to be bigger than Italy's, but it still has more room than anyone else here, so Germany is cleared. Then there's Canada and Canada's debt is a strange one because

[5:40] it has two official numbers. Canada's government debt is 111% of its economy. Canada's government debt is also 10% of its economy. Both are official figures from the International Monetary Fund. So, how can both be true? Well, the first one counts the debts of every level of government in Canada. The second one subtracts the financial assets those governments own and they own a lot, including the giant portfolios of the public pension [music] funds. If you count it that way, Canada has the lowest government debt of the seven. Its federal government also borrows in its own dollars, so it passes rule two as well. That makes Canada's books the cleanest of the seven, so

[6:20] Canada is clear, too. And Canada actually hands us the next clue. Because its prime minister is Mark Carney, who used to run the Bank of England. Back in 2016, he said Britain was relying on, quote, "the kindness of strangers." He was talking about the foreign investors Britain depends on for money. Six years later, the strangers stopped being kind. This is the interest rate on British government debt in September 2022. Watch

[6:48] what it does in just three trading days. On Friday, the 23rd, a brand new government announces tax cuts worth 45 billion pounds a year with no plan to pay for them. The day before, on Thursday, Britain paid 3.6% on a 10-year loan. By Tuesday, it's 4 and 1/2% The pound briefly touches $1.03, the lowest it has ever traded, and then it gets worse. British pension funds had borrowed money using their government bonds as security. The problem is, when the rate on a bond jumps, the bond itself is worth less. So, the funds have to sell bonds to raise cash. That pushes prices down again, which forces even

[7:30] more selling. On day five, the Bank of England steps in and offers to buy up to 65 billion pounds of bonds. It ends up needing 19. Now, watch how fast Britain reverses. Day 10, the government drops its most controversial tax cut. Day 21, the finance minister is fired. Day 24, his replacement scraps almost everything that's left. By now, 32 of the 45 billion is gone. Day 27, the prime minister resigns. By the way, a British tabloid had pointed a webcam at a lettuce to see which would last longer,

[8:05] the lettuce or the prime minister. Spoiler alert, the lettuce won. But anyways, that's rule three. Lenders can lose trust in you in a matter of days. So, the question is, can your government change course just as fast to win them back? Britain did it in under a month. Its own central bank bought it at the time, which is rule two again, and its political system removed the people responsible. Today, Britain pays 5.4% on 10-year debt. That's the highest of all seven, and it's higher than the worst day of 2022. But, back then, a jump like that took three trading days. This time, it took seven months and nothing

[8:43] snapped. Britain's new government has also put in writing that it will keep to its borrowing rules. So, yes, Britain is expensive, but Britain is cleared. Five down. So, now it comes down to Italy and France. And if you just look at the raw numbers here, they do point at Italy. Italy's debt is 138% of its economy.

[9:01] France's is at 118. And Italy's credit rating sits at least three steps lower. But, [music] we have three rules. So, let's score them. Rule one, who do you owe? Well, Italy owes about a third of its debt to foreigners. France owes more than half. On top of that, Italian households hold about an eighth of their government's debt directly. In France, households and ordinary businesses together hold about 1%. And remember the Japanese investors, the ones selling the debt of one of the other countries in 2024? Yeah, that country is France. They hold about 150 billion dollars of French bonds, government and company bonds. In 2024, they sold about 24 billion dollars more

[9:44] of France's government debt than they bought. So, Italy passes rule one and France fails it. Rule two, which currency? Well, both of them owe euros and neither of them can create euros, so they both failed rule two and that's dangerous because a country in the euro has no money press of its own. When lenders panic, the only one who can step in is the European Central [music] Bank

[10:07] and Italy has already been through that. Back in 2011, during the euro crisis, lenders started turning on Italy and on the 5th of August, this letter went in secret from the European Central Bank to Italy's Prime Minister. It listed what his government had to do. Balance the budget by 2013, tighten pensions, cut public sector pay if necessary. Within days, the Central Bank started buying Italian bonds. Italy moved within weeks and lenders still pushed its rate to 7 and 1/2% by November. See, the power to create euros sat with the European Central Bank, so nobody else got to decide what was enough. The Prime Minister resigned and an unelected

[10:48] economist replaced him within a week and three weeks later, the pension cuts were in force by decree. Now, Italy made every payment on its debt, but its budget was written to satisfy a letter from the Central Bank and for a big rich country, this is how bankruptcy starts. Your lenders begin writing your budget, which brings us to rule three. How fast

[11:08] can you turn? [music] Let's take Italy first. It's had one government since October 2022, which is the longest lasting in the history of the Republic. If you leave out interest, Italy has collected more than it spent in 26 of the last 31 years. France only managed that in four of those 31 years and it hasn't done it once since 2001. Then, on the 2nd of October 2026, as its borrowing cost jumped, Italy's finance minister cut the extra borrowing he wanted for defense from 22 billion euros to 14. So, lenders turned and Italy turned with them in the same week. Now, France, if you count the interest, the

[11:46] last year the French state took in more than it spent was 1974. That's 51 deficits in a row. Fixing that takes votes, so let's look at who has to find them. Five people have held the prime minister's job since the start of 2024. Parliament voted two of them out. The parties in government hold 162 of 577 seats, and their last budget was forced through without a vote three separate times. Then lenders turned. In September 2026, France admitted its deficit was growing again to 5.4% of its economy and said it would borrow a record 340 billion euros in 2027. That's 1.3 billion euros every working day. So,

[12:30] in the first days of October, money left French bonds for German ones, and France's 10-year rate touched almost 5%. And here's what makes it worse. France pays an average of 1.9% on its old debt. On new 10-year bonds, it pays 4.9. So, as old bonds come due, France replaces them at about double the price. So, lenders turned on France. Did France turn back? Well, on the 9th of October 2026, the group of French politicians in charge of the budget took the part that sets next year's taxes and rewrote it. Their new version would have wiped out the cut to the deficit that the government had planned, and then they voted against

[13:10] their own version. Three in favor, 31 against. So, Italy passes rule three as well, and France fails it. Lenders have already scored it the same way. Italy and France borrow in the same currency, so the gap between them comes down to trust. Italy pays 4.6% France pays 4.9% [music] Italy is cleared apparently which leaves us with France. France is the only of the seven that fails all three rules which makes it the rich country first in line to go bankrupt. And that's bad news for the other six as well because France is too big for the rescue system Europe built. Look at this. This is everything

[13:49] the Eurozone's two rescue funds have ever lent to five countries. 295 billion euros. France plans to borrow more than that in 2027 alone. The main fund can lend 500 billion at most and France's debt is seven times that. And France is meant to supply a fifth of that fund's money itself which means only the European Central Bank is big enough. Since 2022 it has had a tool for buying the bonds of a country under pressure. That tool comes with conditions. It has never used it. So what does first in line actually mean here? It means France is next in line for a letter like Italy's. If its

[14:29] borrowing costs keep climbing France will end up needing the European Central Bank to step in. And just like with Italy that help comes with a list of demands. If France accepts them other people end up writing its budget. And if you fight it well just look at Greece. In June 2015 Greece's government put its list to a referendum. Two days later its banks were shut. And two days after that pensioners with no bank card were queuing outside branches opened especially for them to collect 120 euros

[14:58] for the week. Greece signed in the end. Today before interest it collects almost 5% of its economy more than it spends and its debt measured against its economy fell by nine points in a single year. That's a big part of why Greece now borrows cheaper than France. Now to be fair lenders are betting that France keeps paying. The price of insuring its debt implies roughly a one in 15 chance of default over five years. And on the 1st of October, near the worst of the sell-off, France borrowed 12 billion euros and lenders had offered 27, so they still show up. They charge more each time and France won't go through

[15:35] this alone. Every one of the other six is tied to France in some way and one of them could even get there before France does. Italy gets hit first. French banks are the biggest foreign lenders into Italy with more than 40% of the total. On the day French bond sell-off, the extra interest Italy pays over Germany jumped to its highest in a year and a half. So, if France goes, Italy probably follows within days. Germany gets the bill. It's the biggest backer of the rescue fund and German investors hold more than 400 billion dollars of French bonds. Japan was already selling two years before any of this. You saw the

[16:11] numbers. But honestly, Britain's banks have the most to lose. They've lent more into France than any other country's bank. Canada's banks have lent the least of the six, so they're safe here. Once again, Canada has the cleanest books. And then there's America. I said I'd come back to two things. Now is the time. The first is where the money ran. In the last euro crisis, when Europe panicked, the world's money ran into American government bonds and America's 10-year rate fell from 4% to 1.4. In this panic, the money ran to German bonds and to the dollar. American bonds got one good day and over the whole

[16:47] sell-off, America's 10-year rate actually went up to 5.3%, its highest in 24 years. That makes three scares in two years where American debt failed as the place to hide. April 2025, the Iran war in March and now this. The second is that 2027 deadline. France's crisis arrives whenever lenders decide. America's has a year on it. It hits the cap in 2027, so here's the curious way I could be wrong about the order. If Congress still refuses to lift the cap once the Treasury runs out of room, the

[17:20] country I cleared second could go first. So, France is first in line and the queue behind it is very short. So, let's see what happens. But, that's it for this video. Thanks so much for watching and I'll see you in the next one.

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