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Debt explodes in major economies. The alert is issued for the USA, France and Italy. What is the cause?

2024-07-08 09:23:17Biznes SHKRUAR NGA REDAKSIA VOX

Despite still favorable financing conditions and GDP recovery, no G7 country is on track to return debt-to-GDP levels to pre-pandemic levels – in fact, their debt ratios are expected to rise again to historic highs in 2020. This at a time when small countries that are showing fiscal prudence, such as Greece, are rapidly reducing their debt, as S&P and Scope Ratings point out. In addition to the debt accumulated due to the global financial crisis of 2008-2011, developed market countries borrowed heavily in 2020-2022 to deal with a series of global shocks such as the pandemic and the energy crisis. At the start of this borrowing spree, interest rates were extremely low, supported by quantitative easing.

Now that the pandemic is over, central banks have raised interest rates and reduced their positions in government bonds. This has gradually increased the cost of borrowing for developed market countries, while prolonged inflation continues to increase nominal GDP and incomes. However, despite or because of these still favorable financing conditions, there has been no public finance emergency among major countries, while progress on structural fiscal consolidation has been limited.

Six G7 countries – Italy, the US, France, Belgium, Finland and New Zealand – which account for 60% of advanced economies' GDP, will see their debt-to-GDP ratios rise further over the next three years, estimates S&P. Specifically, the US, Italy and France would need to improve their primary fiscal balances by more than 2% of GDP cumulatively just to be able to maintain debt at current levels, and by 5% up to 8% of GDP to reduce to 2019 levels. In S&P's view, only a sharp increase in market pressures could persuade these governments to implement more decisive fiscal consolidation.

The exceptions to this trend of rising public debt are the smaller countries that had been in the bailouts, namely Greece, Cyprus, Ireland and Portugal, notes S&P. These countries exhibit strong nominal GDP growth and low borrowing costs. Fiscal prudence, inflation and growth allowed their debt ratio to fall by an average of 16% of GDP in 2019-2023, compared to an average growth of 8.5% of GDP in the rest of the developed world. Scope Ratings estimates that within the next five years, the debt indices of the G7 countries will rise close to the historical levels they reached after the outbreak of the pandemic.

Today, the proportion of government spending on servicing the public debt is rising as low-cost old debt is refinanced at higher interest rates, even if there is no change in the borrowing stock.


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