The havoc that the Covid-19 pandemic, the Russian invasion of Ukraine and the inflation crisis are leaving on the finances of the main countries of the developed world threaten to unleash strong world tensions in the coming years in the public debtin a context of rapidly rising prices interest rates and withdrawal of central banks as the main buyers of bonds issued by governments and, given the expectation that countries will have to refinance half of their bonds in the next three years.
In his report on ‘Prospects for sovereign indebtedness of the OECD 2023′ published this Monday, the organization of developed countries indicates that gross and net emissions will increase this year: after a 20% reduction in borrowing needs in 2022 compared to the maximum levels reached in 2020, due to the health crisis, Gross emissions are expected to grow by 6% this year and net emissions by 4%.
The OECD also warns that almost half of the negotiable debt from the OECD (some $23 trillion) will mature (and have to be refinanced) in the next three years. And alert that the costs of borrowing almost they have tripled for OECD sovereign bonds since 2021 -due to the rise in interest rates- and “it seems that they will increase even more in the short term”. The average cost of emissions has gone from 1.4% in 2021 to 3.3% in 2022.
In addition, the OECD report points out the risk posed by the withdrawal of central banks -such as the European Central Bank- from the securities buying market: “The demand for bonds by central banks has evaporated to a large extent, leaving the private sector to absorb large volumes of new issuances and refinancings” that are coming up.
According to the OECD Secretary General, Mathias Cormann“2023 marks the end of a long period of favorable financing conditions for sovereign issuers as they adjust to new realities and a rapidly changing market environment, aggravated by the financial and economic effects of the war of Russian aggression against Ukraine“.
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All of this context brings together the basic ingredients that feed fear of a possible debt crisis in the coming years, which -says the OECD- could be especially harmful for the emerging countries, in competition with the refuge that economies such as the US provide for world savings. “As a result, countries face a high risk of refinancing and many governments will spend a larger proportion of their budgets on debt service [pago de intereses] and they may face greater fiscal restrictions in the coming years,” says the report presented this Monday.
The OECD document stresses that the rise in 10-year bond interest rates since 2021 “is among the fastest relative to other recent periods of sustained and significant yield increases.”