“Roll over” in the context of debt simply means refinancing, that is, taking a new loan to pay off a previous loan.

While this may sound crazy, it is a widespread practice, and not just for financial institutions and governments. Homeowners refinance their mortgages all the time, although the primary reason they do so is to take advantage of lower interest rates.

Of course governments can, and do, refinance to take advantage of lower interest rates as well, but a government’s ability to do this is influenced by how reliant it is on debt financing.

This reliance in turn depends on their willingness to run up fiscal (budget) deficits.

Naturally, the larger the deficit, the more a government has to borrow in the bond market to fund its spending. And, the more time they spend running a deficit, the more time they spend being indebted.

At some point, it is quite possible for a government to become totally reliant on debt financing.

That is, the amount of money they owe is so large that they cannot afford to repay principal payments at a bond’s maturity. Instead, they must borrow again just to pay off the previous loan, regardless of the level of interest rates.

This is one of the most pressing concerns raised in current discussions of the world’s large public sector debt loads (exacerbated by COVID). That high levels of global indebtedness could easily become mass defaults should interest rates rise, and governments cannot afford to make higher interest payments when rolling over their debt.

Which begs the question, why do investors keep lending to the Japanese government?

Surely the combination of extremely low interest rates and a mind bogglingly large debt pile would send potential creditors running away in fear?

The popular, and often repeated explanation is that most of Japan’s debt is held by domestic investors. Which implies that domestic investors are keeping their own government afloat out of some sense of patriotism or national self interest.

This could be true, at least to a certain extent, but is difficult to prove, and overlooks a far more important consideration – the global repo market.

To be continued…