The $2 trillion interest bill hitting governments

by MMC
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The world has spent more than a decade taking advantage of rock-bottom interest rates to stuff itself with debt. An unprecedented bill is coming due.

The world has spent more than a decade taking advantage of rock-bottom interest rates to stuff itself with debt. An unprecedented bill is coming due.

Governments are expected to spend $2 trillion net on interest on their debt this year as higher interest rates make borrowing more expensive, up more than 10% from 2022, according to an analysis of data from the International Monetary Fund conducted by research consultancy Teal Insights and a separate analysis by Fitch Ratings. By 2027, that amount could exceed $3 trillion, according to Teal Insights.

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Governments are expected to spend $2 trillion net on interest on their debt this year as higher interest rates make borrowing more expensive, up more than 10% from 2022, according to an analysis of data from the International Monetary Fund conducted by research consultancy Teal Insights and a separate analysis by Fitch Ratings. By 2027, this amount could exceed $3 trillion, according to Teal Insights.

Note: Data covers general government (central, local and state). Source: Teal Insights analysis of International Monetary Fund data.

Rising interest costs present governments with difficult choices. As debt service absorbs more revenue, politicians face unpopular decisions to raise taxes, cut spending or maintain deficits that will increase interest costs. This comes as they face higher military spending amid growing geopolitical uncertainty, as well as the costs of responding to costly extreme weather events and supporting rapidly aging populations. .

In developing countries, the trade-offs are even more difficult: between repaying debt and making other necessary payments, such as civil servants’ salaries or imports such as wheat and fuel. Government interest costs represent only part of the growing global debt burden. This does not include the cost of repaying maturing bonds or the interest owed by consumers and businesses on their debt.

The rise in the cost of debt is particularly pronounced in the United States, the world’s largest and most indebted economy. The U.S. federal government spent a record $659 billion on net interest payments last fiscal year, according to the Treasury Department. At 2.45% of gross domestic product, net interest payments represented the highest share of the economy since 1998, according to Treasury.

Net interest is already one of the costliest government expenses, behind military spending and social benefit programs such as Medicare and Social Security. Over time, the Congressional Budget Office expects that net interest could become the government’s largest expense. The cost of debt could rise more quickly if interest rates were higher than expected.

Even with the growing debt burden, the U.S. economy has remained strong. Still, higher interest charges could ultimately weigh on economic growth, economists say, as money is invested in government bonds rather than productivity-enhancing private companies.

Republicans say Washington should reduce the deficit by cutting spending, while Democrats would prefer to raise revenue, putting them far from a deal.

With the United States expected to account for a third of all public debt interest paid this year, the problem of rising costs plagues many countries. And much of the world is suffering more severe economic consequences than the United States.

China’s economy is struggling under a mountain of debt taken on by local governments and real estate developers to fuel the country’s infrastructure development.

Much of Chinese government borrowing is taken out by local authorities and is off balance sheet, making it difficult to track. Analysts estimate that local government financing vehicles, or LGFVs, have accumulated more than $9 trillion in debt, equivalent to about half of China’s GDP.

China’s debt problem is not rising interest rates but the scale and speed with which the debt was incurred. Many investments performed poorly, earning far less than the interest rates LGFVs must pay to their lenders, according to Rhodium Group.

Beijing has pledged to defuse the situation by offering support to the real estate sector and helping local governments swap LGFV debt for cheaper government-guaranteed bonds, according to local media. Meanwhile, consumers have cut back on spending as property prices have fallen, weighing on Western brands that rely on Chinese consumers for sales.

“Ultimately, the secret to solving debt is not a secret at all: It is a political process of distributing losses,” said Michael Pettis, professor of finance at the Guanghua School of Management from Peking University. politically the most vulnerable: households. »

In Europe, concerns remain about heavily indebted countries like Italy, but overall debt levels are expected to ease in the coming years. European Union rules requiring members to limit budget deficits to 3% of GDP and the debt-to-GDP ratio to 60% are expected to be reinstated next year, even if countries increase their military spending following the Russia’s invasion of Ukraine. These rules were suspended due to the pandemic and the energy crisis.

Investors have become sensitive to government spending plans. Proposed tax cuts from the Italian and British administrations have fueled market volatility.

In poorer countries, policymakers already have to choose between spending on citizens and crucial imports or paying down debt.

Lesetja Kganyago, South Africa’s central bank governor, said in an interview last month that her country now spends more on debt interest payments than on health care. “It looks like this could soon be the case in education as well,” he said.

This year, about a dozen countries are expected to spend at least a quarter of their income paying interest on public debt, according to analysis of IMF forecasts by Teal Insights. For most developed markets, this ratio is less than 10%.

In Egypt, where debt interest is expected to reach nearly 40% of government revenue this year, the government has struggled to pay for wheat imports and recently tried to negotiate black tea imports with Kenya, according to officials. media.

The Pakistani government has cut spending on education, health and development in the face of soaring interest costs. The debt crisis has helped push 12.5 million people into poverty over the past year, according to the World Bank.

Teal Emery, founder of Teal Insights, says he fears more countries will be forced to default on their debts as rising rates cut off funding. China has cut back on lending to the developing world as many of those projects struggle and Beijing struggles to contain its own debt crisis. Asset managers and other investors have backed away from risky bets on developing countries as rising yields on ultra-safe U.S. bonds beckon.

“We are facing a latent development crisis,” Emery said. “Every dollar that goes toward debt service is not a dollar that’s going to help with education, with building infrastructure that will create growth. You’re seeing an increase in poverty.”

Rebecca Feng and Eric Sylvers contributed to this article.

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com, Andrew Duehren at andrew.duehren@wsj.com and Peter Santilli at peter.santilli@wsj.com

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