The rise in public financing costs puts France, Italy, and the UK in the spotlight for investors, while Spain closely observes the impact on the eurozone.
The governments of major advanced economies are facing a historic increase in their debt. According to infobae.com, investors are offloading sovereign bonds, and many wealthy countries are now paying more to finance themselves than at any time since the 1990s or 2000s. The public debt of these economies is roughly double the GDP compared to the beginning of the century, which exerts enormous pressure on budgets.
Even before the latest wave of sales, it was estimated that this year governments would allocate 8% of tax revenues to pay interest on net debt. The aging population and increased defense spending exacerbate the situation. They now have to pay even more to refinance past debts while continuing to borrow with hardly any restrictions.
Part of the bond market decline is due to good news: the US economy is growing strongly, with low unemployment benefit claims and growth that could exceed 3% annually. Artificial intelligence companies are competing with governments for capital to build data centres, pushing interest rates higher. This is compounded by less welcome pressures, such as the energy crisis caused by the war in Iran, which has raised inflation.
“President Donald Trump has recently reflected that inflation can reduce debts 'very quickly'”
Trump has also renewed his attacks on the Federal Reserve for not lowering rates. In France, the left-wing populist candidate Jean-Luc Mélenchon has accused the governor of the Bank of France of treachery. Bond investors perceive a growing danger that governments will use inflation to reduce the real value of debt.
The impact varies by country. The United States has the advantage of issuing the world's reserve currency, but its annual budget deficit, around 6% of GDP, is unsustainable. Japan has seen its ten-year bond yield exceed 3% for the first time since 1996, although its debt is decreasing as a percentage of the economy.
Europe is where the risk of a debt crisis is most intense. The rise of artificial intelligence raises the cost of capital but drives less growth than in the United States. Dependence on energy imports weighs down the economy, and a potential global shortage of liquefied natural gas would worsen the situation if winter is cold.
Germany, Scandinavia, and Switzerland keep their budgets in order, but the UK, France, and Italy are wobbling. The UK already suffered a bond market revolt in 2022, and its debt-to-GDP ratio continues to grow. Italy has stable net debt but at 129% of GDP, fragile in the face of any panic. France is the country under the most pressure: a deficit of 5.4% of GDP is expected this year, and according to estimates from The Economist, if it had to refinance all its debt at current rates, the burden would be unsustainable.
For Spain, the scenario poses an indirect risk: a debt crisis in France or Italy would raise the risk premium for the entire eurozone and increase the Treasury's financing costs. Upcoming debt maturities in France and Italy will be crucial in measuring real market tension.
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