The rising cost of borrowing and the high volume of public debt are straining the budgets of major governments. France is the country facing the greatest pressure, with a projected deficit of 5.4% of GDP.
The governments of major advanced economies are facing an unprecedented rise in their debt costs in decades. With investors offloading bonds, many wealthy countries are now paying more to finance themselves than at any time since the 1990s or early 2000s, according to La Vanguardia. The public debt of these economies is now double in proportion to GDP compared to the early 2000s, putting enormous pressure on public finances.
Even before the latest wave of sell-offs, it was estimated that governments would allocate this year 8% of tax revenues to net interest payments on debt. The aging population and increased defence spending exacerbate the situation. Now, they also have to refinance past debt at higher rates while many continue to borrow without restrictions.
Part of the declines in the bond market is due to good news: the US economy is growing strongly, unemployment benefit claims are low, and productivity is accelerating. Artificial intelligence companies are competing with governments for capital, pushing interest rates up. Additionally, inflationary pressures from the conflict in Iran and doubts about the credibility of economic institutions in the populist era add to the risks.
“Trump recently commented that inflation can reduce debts 'very quickly' and has once again attacked the Federal Reserve for not lowering interest rates.”
The impact varies by country. The United States maintains the advantage of issuing the world's reserve currency, but its federal deficit hovers around 6% of GDP, an unsustainable figure. In Japan, the yield on the ten-year bond has surpassed 3% for the first time since 1996, although debt continues to decrease as a proportion of the economy.
Europe concentrates the greatest danger. The rise of artificial intelligence increases the cost of capital, but European growth is much lower than that of the US. Dependence on energy imports and a potential shortage of liquefied natural gas in winter add risk. The UK, France, and Italy are wobbling, while Germany, Scandinavia, and Switzerland maintain healthier accounts.
France is the country under the most pressure. Its budget deficit is expected to reach 5.4% of GDP this year. According to calculations by The Economist, if it had to refinance all its debt at the current yield of the five-year bond, it would need a fiscal adjustment of over 4% of GDP to stabilize its indebtedness. However, parliament is barely managing to approve cuts that amount to a tenth of that figure amid student protests.
The UK already suffered a bond market revolt in 2022 and, although it corrected its course, its debt-to-GDP ratio continues to rise. Italy, with a net debt of 129% of GDP, is fragile and could collapse in a panic. Investors are already forcing France to pay 1.5 points more than Germany to borrow for ten years, the largest difference since the debt crisis.
You may also like
