Optimal National Leverage: Shape, Not Size |
Debt-to-GDP is the wrong number. What decides whether a nation survives a shock is the shape of its borrowing, not its size — as a war that should have broken Israel’s finances quietly proved.
There is a number with totemic power in 2026, and it is the wrong number. As Britain’s thirty-year gilt yield punched above 5.8 per cent this spring — a level last seen in 1998 — and Japan’s long bond hit an all-time high, the commentary reached reflexively for debt-to-GDP. The United States is past $39 trillion and 125 per cent of output, its net interest bill set to overtake the defence budget. The OECD reports a record $29 trillion of bond issuance this year, four-fifths of sovereign borrowing merely refinancing what exists — and treasuries are quietly shortening maturities to dodge a punishing long end, buying a cheaper coupon at the price of heavier rollover risk.
These figures are sobering, but they answer a question no creditor asks at the moment of truth. The level fixation rests on weaker ground than its confidence suggests: the famous Reinhart-Rogoff threshold, beyond which debt supposedly throttles growth, did not survive scrutiny once researchers found the spreadsheet error and the selective exclusions beneath it. Sovereign crises do not arrive because a ratio crosses a line. They arrive when a government can no longer place its paper at home — a function not of how much it owes but of to whom, in whose currency, and for how long. The level is the headline. The structure is the story.
Borrow the corporate frame. A company’s capital structure is its blend of debt and equity, and Modigliani and Miller taught that in a frictionless world the blend is irrelevant to value. The nearest sovereign analogue is Ricardian equivalence — an imperfect cousin, since Ricardo’s proposition concerns the timing of taxation rather than the mix of claims, but it carries the same moral: tax now, or borrow and tax later, and a rational public sees the same lifetime burden. In neither case does the financing mix matter — in theory. The interest lies in how violently the theory fails, and it fails far harder for a state.
Why? Because the frictions that break Modigliani-Miller are, for a nation, close to absolute. A firm that cannot pay is wound up; a liquidator arrives, assets are sold, claims are ranked, the residual belongs to shareholders. A nation has........