Awaiting payment: Why Europe's Debt Burden is becoming Dangerous
The cost of servicing government debt in developed countries continues to grow rapidly. The UK set another record for its bond yields, where there were no such indicators even during the disastrous premiership of Liz Truss. The situation is getting worse every year: not only profitability is growing, but also the level of debt burden. Meanwhile, this problem is by no means just a British one.: Over time, it is increasing in most developed countries and in many leading developing countries. At the same time, the possibilities to deal with it outside of shock therapy in the "Argentine style" are extremely limited.
"Have you seen their government debt?"
This expression is often used in a serious or ironic way in relation to the United States. Indeed, in absolute terms, the volume of America's public debt is astounding. But in terms of the ratio to GDP in this case, although the indicator is high, it is not catastrophic. Especially considering the US position in the global financial system and the level of liquidity in the US government bond market. When it comes to countries that are less important to the global economy, even large ones, the situation becomes completely different.
Great Britain is one of the most striking examples. This week, the yield on 35-year bonds reached 5.6% per annum. This is an absolute record of the 21st century and the highest figure since 1998. The previous maximum, significantly lower, was set in the cadence of Liz Truss in 2022, when the "mini-budget" led to a "mini-crisis" — in duration, but not in severity. Medium-term bonds with a maturity of 10 years behaved in a similar way, with yields reaching 4.7%. Finally, the real rate on inflation-linked bonds exceeded 1.5%.
That's a lot. The UK sounded the alarm about the national debt situation last year. Payments on the national debt amounted to more than 126 billion pounds by the end of the 2024/2025 financial year — about 9% of all budget expenditures, or over 4% of GDP. This is more than twice the total defense spending of the United Kingdom. Compared to the period 2020/2021, which saw the peak of the coronavirus pandemic, the increase turned out to be almost threefold. The market situation is unlikely to improve: the largest increase in yields is observed on long-term bonds, and they together with medium-term bonds account for almost 40% of the total debt of the UK.
Like after the war
The government of the Labor Party that came to power established a "budget rule" for itself, according to which it pledged to balance the budget by 2029. For this purpose, taxes were raised, which led to a decrease in business activity and the departure of some businesses from the City of London to other places — from Milan to Dubai. Nevertheless, even with the growth of tax revenues, it has not yet been possible to fundamentally change the budget situation.
Meanwhile, the country's total public debt has already reached 96% of GDP. The last time such figures were recorded was in the early 1960s, but then debts were rapidly declining as the state gradually completed the financial consequences of the Second World War. Now the situation is reversed: debt is accumulating rapidly. On the eve of the 2008 financial crisis, it was less than 38%, meaning it has increased 2.5 times in relation to GDP over the past 17 years. All this happened in peacetime, with the historical minimum of British defense spending (which, on the contrary, the government now intends to increase).
Of course, there have been quite a few events in the United Kingdom over the past few years that have hit the economy and forced it to increase debts, from Brexit to covid. But even adjusting for all this, such a rapid increase in debt seems surreal.
Why did this become a problem at all? The national debt has been a topic of discussion in the West and in the UK in particular for a long time. By historical standards, the current figures are very high, which is naturally alarming. However, debt threats were mostly caused by either very non-mainstream economists or various extravagant investors like Jim Rogers. The rest did not notice any significant problems, although since the mid-2000s, debt figures throughout the OECD (the so-called club of rich countries) have consistently increased.
During this time, two main factors of the current situation have formed. First, the debt-to-GDP ratio has jumped almost everywhere over the past two decades. As we can see in the British case — 2.5 times. Secondly, the 2020s were marked by a significant increase in inflation and, consequently, refinancing rates. Paying off one's own debt has become more difficult and expensive than in the post-crisis period of near-zero rates.
Greece is just the beginning
The first wake-up call for OECD countries was the Greek debt crisis that unfolded in the early 2010s. The scale of the "bailout" of a debt-ridden member of the eurozone was unprecedented. However, in the end, the Greeks themselves took on most of the losses, while their creditors received full compensation. As a result, there was no default, but Greece's GDP is currently more than 20% lower than in the mid-2000s. Such a prolonged and severe economic drawdown has not been observed in developed economies for a very long time. Greece almost pulled Italy and Spain down after it, but EU intervention there was able to stop the "perfect storm".
Now the fire is beginning to spread not only to traditionally stable European countries, but also outside the EU, as the example of Great Britain speaks quite eloquently. At the same time, it is unclear how to get out of this situation. Further tax increases may temporarily stabilize the situation, but what will happen to the broader economy? Even before this increase, Britain had huge problems with both the "drying up" stock market and the outflow of large private and corporate taxpayers. As a result, it may well happen that an increase in taxes will not increase their collection at all, but it will lead to a large-scale recession. While the UK does not shine in terms of the pace of economic development, and nominal growth of almost 100% is provided by the size of the population. Finally, possible reforms will have to be carried out in the context of a growing coma of social problems, primarily mass migration, which is increasingly causing discontent among the British population.
Government bond yields are now rising in almost all G7 countries. Multi-year highs have been set in Germany, France, Canada and Japan in recent months. At the same time, France now looks like the most problematic case. Its fundamental weakness is already a huge national debt exceeding 110% (it is believed that the formal reason for concern is the indicator of 100%, although much in this case depends on the specific country). Moreover, there are practically no reserves from which to collect extra euros. In France, government spending already provides 57% of GDP — there is literally nowhere to increase it. With this ratio, the question arises: can the Fifth Republic even be considered a market economy if the government participates in the redistribution of resources by more than half?
On average, an OECD country owes about 111% of GDP, compared with barely 70% in the mid-noughties. There are no special options to get out of the stupor. Theoretical logic suggests lowering the rate, but the answer to this will be strong inflation, which has barely been suppressed. Debt monetization is the most extreme step that Europeans will not take unless all other options have already been tried. But everything is going to the fact that this moment will come soon. The national debt has become a very real problem, the solution of which is unlikely to be directly spelled out in a school textbook or even in the writings of professional economists.
Переведено сервисом «Яндекс Переводчик»
