The illustration used was, two guys borrowing $1 million each. One has zero bank balance, the second has another $1 million to his name. First guy has net debt of $1 million, second guy has net debt of $0, even though he has a gross debt of $1 million. Both guys are betting they can secure higher returns from the open market than their borrowing cost. And both guys are exposed to the same financial risks.
The second fella is similar to the investment entities of Singapore, namely Government of Singapore Investment Corporation (GIC), Temasek Holdings, and the like (there must be more than one $2 company out there somewhere). The sleight of hand here is the Special Singapore Government Securities (SSGS), a special bond unique to this country. A bond is a promissory note that an issuer undertakes to repay at a due date with a stipulated interest rate. Simply stated, money is taken from the hard earned savings of Singaporeans lodged in the Central Provident Fund (CPF) account to play in the financial markets. The irony not missed here is that the justification for withholding a Minimum Sum in CPF is to ensure senior citizens won't gamble it all away.
The Finance Ministry boasts: "The investment returns are more than sufficient to cover the debt servicing costs." Since the people are seeing only a pathetic 2.5 to 4.00 percent return on their own monies, they had better make sure they deliver on the promise. Never mind if Christopher Balding has the charts to show that, no way, Jose, has Temasek ever achieved the double digit returns they crowed about.
Balding also points out that should GIC and Temasek fare poorly or collapse, the Singaporean tax payer will end up with the cost of guaranteeing the CPF. Should GIC/Temasek end up in a position not being able to pay back the debt, the government will simply raise taxes on the CPF holder, asking him to subsidize the losses incurred by Temasek/GIC. Ever wonder why costs for government and government related services keep going up even though productivity and innovation in the public sector are heading in the opposite direction?
The second guy in the above example will still lose his shirt when the weather turns if his $1 million was secured as collateral for the loan, no matter if his debt is designated net or gross. GIC/Temasek should be made accountable for their own gambling debts. Like the spectacular blow-out at middle-income housing projects Stuyvesant Town and Peter Cooper Village: "The government of Singapore, well, they lost the most — over US$600 million. It all just went poof.” (Charles Bagli, "Other People’s Money").