The United States recorded a federal budget deficit of US $ 3.1 trillion in the year ending September. The US national debt now exceeds $ 27 trillion and its debt-to-GDP ratio is nearly 130%. Australia’s is 45 percent.
If the Biden administration was able to implement its proposed new pandemic response plan, an additional $ 2.4 trillion would be added to U.S. deficits and debt. Even without it, the Congressional Budget Office says U.S. federal debt could reach 195% of GDP by 2050, nearly 50% more than its pre-pandemic projections.
The world, and the developing economies in particular, have been trapped in debt.
In Europe, where the starting point before the pandemic was a eurozone debt-to-GDP ratio of 87%, it will end this year above 100% and continue to climb. In southern Europe – Italy, Spain and Greece – the starting point was higher and the impact of the pandemic greater.
ING released an analysis last week that even if budget balances and growth returned to 2018 and 2019 levels in Europe, it would take until 2029 for the euro area as a whole to return to pre-EU debt levels. crisis. Italy would take until 2060 to return to a debt-to-GDP level of 134.4%, he said.
If governments keep their accommodative fiscal policies, he said, nominal growth is likely to rise to 14.1 percent of GDP from 2021 to 2025 to bring debt levels back to their pre-crisis level. Germany would need annual nominal GDP growth of 18% to return to 2019 levels.
These projections assume that the current favorable interest rate environment persists, which is likely.
The cost of debt has never been so cheap. In the United States, 10-year bond yields are just 0.88% and 30-year yields are 1.62%. In Germany, 10-year yields are negative – minus 0.57% – and investors pay 0.16% for the privilege of owning 30-year bonds. About $ 17 trillion in bonds issued globally now have negative yields.
Australian 10-year bonds return 0.92% and 15-year bonds (we don’t have a 30-year bond yet) return 1.26%. It makes the cost of debt service more affordable than it has ever been before – and the lure of borrowing heavily to respond to the pandemic is overwhelming.
What if interest rates were to increase at some point in the years to come?
ING’s analysis of the euro zone provides broader information. A 200 basis point (two percentage point) increase in bond yields, the bank said, would push back the date when the average debt ratio in the eurozone could return to normal until 2040 at the earliest, and countries that have entered the pandemic with low debt levels could have real difficulties reducing their debt burden.
Whether it is a future increase in interest charges or a new economic and financial threat, what this tends to highlight is that debt levels are almost unprecedented by historical standards. are probably a semi-permanent feature of the global economic landscape.
They will force central banks to continue to hold interest rates at ultra-low levels to avoid financial and economic debt crises, and will inevitably restrict public spending and hurt living standards in the future.
The world, and developing economies in particular, have been trapped in debt as the pandemic added to the legacy of the 2008 financial crisis just as GFC-related debts stabilized.
It took about a decade for the world to recover from GFC. From a much weaker starting point – thanks to GFC and the responses of governments and central banks to this earlier crisis – it will take much longer to stabilize the finances shaken by the pandemic and create platforms for growth. more stable in the future.
While companies globally have also engaged in an orgy of borrowing (Australian companies have generally preferred equity over debt), those who aren’t fazed by the bleak economic outlook will be equity market investors and investors such as private equity and hedge funds who use leverage to drive return.
The distribution of COVID-19 vaccines next year could allow governments to end the continued damage to economic activity from lockdowns inspired by the pandemic and community concerns, and reduce the massive fiscal responses adopted in an attempt to limit the economic pain for businesses and households.
However, that will do nothing to deal with the destabilizing and restrictive – and ever-growing – mountains of debt that the pandemic will leave behind.