Source: Wall Street News Author: Zhao Ying
Moroccan economist Seth Carpenter believes that global interest spending will increase from 2.5% of GDP now to 3.5% by the end of this decade, and that debt sustainability will be the focus of attention for the next decade or more.
As debt/GDP ratios in developed countries rose sharply during the pandemic, debt sustainability issues gradually surfaced.
Morgan Stanley pointed out in its latest report that global interest spending will increase from 2.5% of GDP now to 3.5% by the end of this decade, and that debt sustainability will be the focus of attention for the next decade or more.
The increase in this ratio became a reality during the pandemic as debt increased due to fiscal expansion while GDP contracted.
Although rapid growth in nominal GDP partially offset the declining effect of the denominator as the economy recovers from the recession of the pandemic, the debt level (numerator) will return to focus as inflation falls and economic growth returns to normal.
Damo provides a framework for thinking about the evolution of debt/GDP ratios in developed market economies. Its predictions indicate:
There is a huge risk that debt levels will be unsustainable, especially in the next few years. As the cost of debt burdens converges with market prices, fiscal consolidation is needed to stabilize the debt-to-GDP ratio.
The complexity of the debt problem is that there is no simple answer to determine a safe threshold for the debt/GDP ratio. Daimo's chief global economist Seth Carpenter stated:
Given that the average maturity of developed country sovereign debt is between 5 and 10 years, government debt is still adapting to generally higher nominal interest rates. This repricing will lead to a turning point where the cost of debt begins to rise at an accelerated pace. According to rough estimates of the forward-looking curve, global interest expenditure as a share of GDP will increase from 2.5% now to 3.5% by the end of this decade.
For most countries, the current basic deficit is far above stable levels. This gap is most pronounced in some of the countries with the highest levels of debt — the US, France, and the UK. To stabilize debt/GDP, these countries need to keep their major deficits below pre-pandemic levels within the next few years. Debt sustainability is a topic for the next decade or more. Furthermore, fiscal outcomes are policy choices rather than economic outcomes.
Damo gave the example of France:
As the second-largest economy in the Eurozone, questions about its fiscal stability could have widespread repercussions. According to recent data, France's debt/GDP exceeds that of Spain, but it is still nearly 140% lower than Italy's.
The market has been considering Italy's fiscal situation for decades, indicating that there are no simple threshold measures. In other words, Italy needs a basic surplus to stabilize its debt level. In the ten years after the global financial crisis and before the COVID-19 pandemic, its basic surplus averaged 1.5%.
Furthermore, Damo reminds that America's interest rate as a share of GDP peaked in the early 1990s, and that the basic balance often surplus occurred during and after that time. History shows that even if there is an overall deficit, basic balance or surplus is possible, so it is necessary to distinguish between the main fiscal balance (including interest expenses) and the overall fiscal balance (excluding interest expenses).
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