Government interest costs will reach $2.8 trillion by 2025, limiting fiscal spending and government spending in economically productive areas, according to the multinational’s director of fixed income, Jim Cielinski.
This will make governments even more dependent on bond markets, increasing the possibilities of confrontations between states and bondholders.
Cielinski indicated that the British government’s decision to reverse a series of tax cuts – which led to strong financial stress on pension funds – and the current debate in the US Congress on the debt limit are examples of “spending must be kept in check” to conform to the markets.
In other words, there will be no worse time to get into debt than in the coming years. This situation contrasts with the era of ultra-low interest rates, low-cost debt, and central bank bond-buying programs that characterized the decade after the 2008 financial crisis and that had its greatest exponent in the policy exercised during the coronavirus pandemic.
Now, on the contrary, the monetary entities not only raise the rates, but also get rid of their bond holdings. According to an index compiled by Janus Henderson, government interest costs grew by 21% in 2022, the highest percentage since 1984.
Meanwhile, the total mass of sovereign debt grew 7.6% and reached a record of US$ 66.2 trillion.
“We went through almost two decades of a large debt that did not have much impact on interest rates. That stage is over and the fiscal problem will probably be one of the problems that will define the next decade,” Cielinksi told the Bloomberg agency.
In addition, he considered that, once the central banks eventually cut rates, they will then leave them at a higher equilibrium point than the “extreme floors of recent years” where even, in some cases, such as in Europe, they were less than zero.
Source: Ambito
