DEBT RATIO

The ratio between public debt and GDP. Also known as the debt-to-gdp ratio. The lower this ratio, the higher a country´s solvency is.

For example, if the debt ratio of a country is 0.5, the country would have to spend half of its GDP that year to be able to pay back all of its debt. However, if the debt ratio of a country comes out as 1, it would have to use all of its GDP that year to cancel out its public debt. Governments in today´s world don´t usually pay back all their debts at once but they do usually pay back their debt over the course of many years. This practice can lead to an unsustainable situation if by the combination of putting off current debts and taking on new debts, a government can find itself unable to repay the debt under the contracted conditions or even worse, it can default entirely.