The International Monetary Fund (IMF) has issued a grim warning about global debt levels, forecasting that the share of debt to global gross domestic product is likely to grow from 94% a year ago to 100% by April 2029.
That is “a level previously reached only in the aftermath of World War II”, the IMF says in its latest Fiscal Monitor.
Almost simultaneously, Henry Paulson, a former US treasury secretary, called publicly for “an emergency break-the-glass plan” to counter any sudden collapse in demand for US Treasury bills. The factors which might trigger such a scenario mirror those highlighted by the IMF.
Paulson’s warning hinges on the potential for a vicious spiral where bond investors’ concern over rising US debt prompts them to demand higher Treasury yields, which will increase debt levels.
The IMF projects that gross government debt in the US will jump from 123.9% of GDP at the end of last year to 142% by 2031. It cites the immediate impact of US policy on the fiscal situation. Ten-year Treasury yields spiked from 3.96% just before the war in the Middle East in February to 4.48% a month later.
Changes among the buyers of sovereign debt also raise risks. According to the IMF, private investors, who are often leveraged, have become marginal buyers of government bonds as central banks unwind their balance sheets. “Hedge funds now play a larger role in intermediation.” And leveraged private investors are vulnerable to interest rates.
US action to fund its debt burden with more issuance is not helping, according to the IMF, noting that no debt consolidation plan is in sight. “The increase in the US Treasury security supply is compressing the safety premium that US Treasuries have traditionally commanded – an erosion that pushes up borrowing costs globally.”
The US is by no means the only problem debtor identified by the IMF. Almost all developed economies suffer from similar problems. However, the size of the US debt market, along with the country’s current policies, make it especially important.
Paulson highlighted the risk of a debt crisis where the Federal Reserve has to step in as buyer of last resort for US Treasuries. If such a situation arises, “it will be vicious, so we have to prepare”, he said.
The IMF calls for clear communication of fiscal realities and greater transparency to build support for needed fiscal readjustments. Such policies seem unlikely under the current US administration.
