The International Finance Association IIF recently released a report stating that record high debt, high interest rates, and turbulent political disputes have all increased the risk of a new credit crisis.
IIF stated that global debt increased by $10 trillion in the first half of the year, reaching a record high of $307 trillion, with over 80% of this coming from developed economies. The soaring borrowing costs have made government debt a focus of attention and urged officials to remain cautious about their stance on public finances. Among them, combined with interest rates and debt levels, the United States, the United Kingdom, and Italy are considered to have higher risks.
US debt risk is pending
The debt ceiling dispute in June this year caused the United States to lose its AAA credit rating. Although the problem was temporarily resolved at the time, the new wave of government suspension has made the outside world realize that this is not the final answer.
Last month, Moody's, an international rating agency, warned that if the US government shuts down again, it will highlight "weaknesses in the US's institutional and governance capabilities". With the Speaker of the House of Representatives still vacant, it is highly uncertain whether the Biden administration can once again avoid closing due to budget differences in over a month.
Olivier Blanchard, a senior researcher at the Peterson Institute for International Economics, believes that the most worrying thing in the United States today is the breakdown of the political budget process and the huge deficit. "How will this end? I doubt that it is not a default, but when investors begin to reflect their concerns about the price of treasury bond".
It is worth noting that nearly 30% of outstanding US government debt will mature within the next 12 months. The US Treasury is guiding the issuance of more long-term bonds, so it is crucial to find a "buyer" for long-term US bonds. Judging from last week's 30-year auction, it is not optimistic.
At the same time, the pressure of interest repayment brought about by high interest rates cannot be ignored. The Congressional Budget Office estimates that net interest expenses in the United States will increase from 2.5% of GDP to 3.6% by 2033, and further reach 6.7% by 2053. US Treasury Secretary Yellen recently commented on the budget deficit and rising interest rates, stating that the government is committed to "sustainable fiscal policy" and will achieve this through budget adjustments.
Dalio, the founder of the world's largest hedge fund, Golden Bridge Water Fund, recently stated that he is closely monitoring the dangerous financial situation of the United States. "The United States will be in a debt crisis, and I believe the speed of this will depend on supply and demand issues. As a result, the economy will experience a significant slowdown.
Europe faces a new round of tests
Tight monetary policy is gradually causing the European economy to stagnate, and high deficits will suppress public investment, further suppressing the prospects for recovery. EU finance ministers will discuss on Tuesday the idea of balancing debt reduction and investment. Daleep Singh, Chief Global Economist at PGIM Fixed Income, said: "If Europe does not have a brighter growth outlook, then debt sustainability looks quite bad
Italy's 2.4 trillion euro debt is the focus of Europe, which is equivalent to over 140% of GDP and has already overwhelmed the government. The International Monetary Fund (IMF) recently warned that debt issues make the country vulnerable to crises. On Monday (16th), the cost of insuring Italy's sovereign debt against default reached its highest level in seven months, after the Italian cabinet prepared to approve the 2024 budget, which heightened concerns about the fiscal situation.
Scope Ratings warns that Italy may lose its participation in the crucial European Central Bank bond buying program. Currently, Moody's credit rating for Italy is in the last tier of investment grade, just one step away from junk grade. Gabriel Makhlouf, a member of the European Central Bank's management committee and Governor of the Bank of Ireland, said on Wednesday that the gap in bond yields between Italy and other eurozone countries will keep ECB officials vigilant.
The "mini budget" crisis in the UK in 2022 indicates that the tightening cycle and fragile economic environment increase the risk of policy errors leading to market collapse. In his first budget since taking office, British Chancellor of the Exchequer Hunter announced a series of emergency measures to make up for the huge public finance black hole left by his predecessor, Kvotten.
In September of this year, the city of Birmingham in the UK stated that it had stopped all new government spending and entered bankruptcy due to the accumulation of huge debts and a financial gap of up to £ 87 million.
This also sounded an alarm to the outside world. In fact, as of the end of May, the net debt of the UK's public sector, excluding state-owned banks, reached £ 2.567 trillion, equivalent to 100.1% of GDP. This is the first time since March 1961 that the net debt of the British government has exceeded 100% of GDP. The Bank of England has raised interest rates 14 consecutive times since December 2021, with the benchmark interest rate rising to 5.25%.
The Office of Budget Responsibility estimates that by 2027-28, the interest cost of British treasury bond will rise from 3.1% in 2020-21 to 7.8% of income, which is exacerbated by inflation related debt. Therefore, the UK government will carry out a series of cuts in public investment over the next three years to achieve its fiscal goal of reducing debt by 2027.
IIF predicts that in general, developed economies will not be unable to repay their debts, leading to a true default. But the government must formulate feasible fiscal plans, increase taxes, promote economic growth, and maintain a controllable financial situation.
However, the occurrence of a credit crisis may cause significant market turbulence. Daniel Ivascyn, Chief Investment Officer of Pacific Investment Management Company (PIMCO), said: "The deficits and debt levels of some economies make us uncomfortable." He said that the company is cautious about long-term bonds, and government spending plans that lack credibility are considered the most likely to trigger volatility.
Claudio Borio, head of the Monetary and Economic Department of the Bank for International Settlements, stated that in the long run, the runaway trajectory of government debt poses the greatest threat to macroeconomic and financial stability.