Column – Afterburners on increasing the supply of private credit: Mike Dolan By Reuters
Written by Mike Dolan
LONDON (Reuters) – Despite worries about rising debt, the world’s biggest economies appear to be doubling down – almost prompting bond investors to cover borrowing costs as central banks pay interest.
If these money-burning companies stimulate the economy as intended and increase the rate of inflation in the money market, it may limit the willingness and ability of central banks to reduce any credit market glut by lowering official rates even further.
And if those market concerns start to look more like a heart attack than trapped air, central banks may soon be forced to stop the flow of credit from their bloated balance sheets to stabilize their private portfolios.
While this may be more of a consideration next year than this, the scene is being made by new and old leaders alike.
NEW DEBT WAVE
With the US budget deficit already approaching 7% of GDP, Donald Trump’s return to the White House and Republican control of Congress means his tax cut proposals are now firmly on the table.
If you believe the average estimate by the nonpartisan Committee for a Responsible Federal Budget, those spending and tax promises could increase the US debt by $7.75 trillion by 2035 — on top of the $36 trillion that remains.
Last week, Britain’s new Labor government detailed its new tax budget and a budget that lined the books with nearly 142 billion pounds ($184.4 billion) more borrowing over the next five years than previously thought.
And Germany’s traditional borrowing limits looked under pressure this week as well, as the ruling coalition collapsed while Chancellor Olaf Scholz pushed to increase debt issuance to fund Germany’s economic stimulus package.
Even before any new German debt leaves the national “debt brake” again, euro zone government borrowing was beginning to look dubious as the European Central Bank plans next year to stop reinvestment in its major bonds.
While the sale of euro government bonds next year is estimated to be a shade below 2024 billion euros, according to Bank of America, the amount of redemptions and purchases by the ECB could reach a new record north of 670 billion euros – -100 billion euros more. than this year.
And then there’s China — in a state of unprecedented public borrowing to prop up the world’s second-largest economy from the effects of a commodity boom and looming trade wars with the United States and Europe.
China’s top legislative body, the Standing Committee of the National People’s Congress, this week considered authorizing at least 10 trillion yuan ($1.4 trillion) in additional debt over the next few years. That financing package is expected to include 6 billion yuan raised through special sovereign bonds.
‘DANGEROUS DEBT’
And all these new measures in just two weeks come after a series of international warnings about credit levels.
Only last month, the International Monetary Fund estimated that the global public debt will be more than $ 100 trillion this year and will increase significantly in the coming years.
What he described as a “worst-case scenario” risks exploding global debt by up to 20 percent above its baseline to 115 percent of global GDP in three years.
That three-year “debt at risk” rate was as high as 134% in advanced economies and 88% in emerging markets.
So-called adverse scenarios include potential growth or interest rate shocks.
Although it did not specify where they might come from, it is not difficult to imagine the consequences of a global trade war or a geopolitical blowup producing a re-acceleration of inflation.
“A larger fiscal adjustment than currently planned is needed to stabilize – or reduce – the most likely debt,” the IMF’s Fiscal Monitor said. “Now is a good time to rebuild the financial buffers and delay is expensive.”
Apparently, not many governments were listening to the fact that monetary easing can be justified by investments that build long-term growth potential or that effective campaigns and trade tariffs make up the deficit.
Financial constraints seem limiting for many, however.
MARKET CONVERSATION
In the bond markets themselves, it is still less comfortable than the emergency room until now.
The US Treasury has been clearly cleaned up by the election result – even if the Federal Reserve’s continued tapering has contained the move and bond volatility has fallen from one-year highs.
Yields hit a four-month high, however, inflation expectations are at their highest in more than a year and the Treasury’s “long-term” “term premia” is at its highest in a year.
British gilts have had their worst post-budget volatility, with 10-year mortgage rates hitting their highest level in a year and hitting a ceiling as the Bank of England cut interest rates again this week.
Germany’s political crisis also saw bond yields rise to a four-month high despite a growing economy and continued ECB easing. Reflecting strong appetite, Germany’s 10-year yield curve worsened by 6.7 basis points, the worst in 20 years.
And yet none of these are crisis levels yet – the demand for bond auctions appears to be sufficient so far and the reduction in cosset interest is not fixed at the moment.
The real test of new credit growth is yet to come – not least when the end of the bank’s easing cycles approaches late next year.
At the very least, “quantitative tightening” may have to end abruptly.
The views expressed here are those of the author, a Reuters reporter
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