Falling cost of debt piles pressure on governments to spend more
The cost of servicing the debt of developed countries has sunk to its lowest level for more than four decades, piling pressure on governments to borrow and spend more in order to jump-start the flagging global economy.
Advanced economies will spend just 1.77 per cent of their combined GDP on debt interest this year according to the OECD — the lowest since 1975, and down from a peak of 3.9 per cent in the mid-1990s.
This sharp decline comes despite the huge debt piles accumulated by many countries since the financial crisis. The debt-to-GDP ratio across advanced economies has risen from 45 per cent in 2001 to 76 per cent this year, according to the IMF.
The question of whether governments should launch a fresh economic stimulus by borrowing to spend more will be a key topic for attendees at Thursday’s gathering of central bankers at Jackson Hole, Wyoming.
Their annual meeting comes as fears grow that monetary policymakers are running out of tools to combat a global slowdown. Calls are intensifying for fiscal authorities to stimulate economies via projects such as infrastructure, digital connectivity and environmental improvements.
“It’s pretty straightforward: if borrowing is cheaper you should probably do more of it,” said Olivier Blanchard, the former IMF chief economist who has become an increasingly vocal advocate of looser fiscal policy. “If your interest rate is very low then monetary policy can no longer be used the way it usually is, so you need to do more with fiscal policy.”
The drop in debt servicing costs is because of investors’ strong demand for government bonds, which has pushed the price of new borrowing to record lows. More than $16tn of bonds around the world trade with negative yields, meaning that some governments are in effect being paid to borrow.
“It’s like the markets are screaming at governments to borrow more,” said Mark Dowding, chief investment officer at BlueBay Asset Management.
But some sceptics worry that the easy money that investors are flinging at governments could offer a dangerous temptation to add to already high debt piles.
“The availability of cheap money doesn’t mean you should borrow for the wrong reasons,” said Maya MacGuineas, president of the US think-tank Committee for a Responsible Federal Budget. “Interest rates might be low today but due to high debt levels we are very vulnerable to any rises in the future.”
Countries with relatively low levels of debt such as Germany are facing growing calls from investors and economists to increase their borrowing.
“Negative yields are investors’ way of telling Germany that it doesn’t have enough debt and we could easily absorb a lot more,” said Eric Stein, a bond portfolio manager at Eaton Vance in Boston.
But the calls for more borrowing are not restricted to relatively low-debt economies like Germany. Donald Trump, US president, signalled this week that he was considering a fresh fiscal stimulus, which would add to his mammoth 2017 tax cuts. US bond yields have since fallen, despite Mr Trump having financed that spending programme by stepping up debt issuance.
Mr Blanchard argued that Mr Trump had spent his stimulus in the wrong areas. “The increase in the deficit might have been justified if it had been used for public investment but it was not,” he said.
He added that calls for a more relaxed attitude to deficits should also apply to Japan where government debt is nearly 240 per cent of GDP.
“Each country is different and surely there is more room for Germany to relax fiscal policy than there is in Japan,” he said. “But even in Japan the fact that private demand is still weak and monetary policy is running out of ammunition suggests that deficits should probably not be reduced until private demand picks up.”