Increasing Bond Yields Risk Debt Spiral in U.S., Japan, BIS SaysAnchalee Worrachate
Major economies risk ballooning debt loads unless their growth can keep pace with increases in borrowing costs as spending on the elderly rises, according to the Bank for International Settlements.
Japan’s public debt would swell to 600 percent of gross domestic product by 2050 on a 2 percentage-point increase in funding costs, should its age-related government spending continue unchecked, the Basel-based BIS said in its 83rd annual report. In the U.S., the debt-to-GDP ratio would almost double to 200 percent under the same circumstances, it said.
“Governments in several major economies currently benefit from historically low funding costs,” the BIS said. “At the same time, rising debt levels have increased their exposure to higher interest rates. The consolidation needs of countries experiencing low interest rates would be greater if their growth-adjusted interest rates were to rise.”
Bond yields around the world jumped last week after Federal Reserve Chairman Ben S. Bernanke said on June 19 that the central bank may begin dialing down its bond purchases this year and end them in mid-2014. That signals higher borrowing costs for governments as the recovery in the U.S. gathers momentum.
Treasury 10-year note yields rose past 2.5 percent for the first time in almost two years on June 21, having climbed from a record low of 1.379 percent set on July 25, 2012. The average yield to maturity on the more-than-20,000 securities in the Bank of America Merrill Lynch Global Broad Market Index rose to 2.03 percent on June 20, the highest since April 26, 2012.
Adding to pressure on state debt loads are burgeoning “age-related” expenses, the BIS said in its report. Government liabilities related to health care and pensions as a proportion of GDP will rise by 9 percentage points in the U.S. between 2013 and 2040, the biggest increase among developed economies, it estimated.
“A rise in interest rates without an equal increase in the output growth rate will further undermine fiscal sustainability” in several major economies, the report said. “Age-related spending will eventually put debt on an upward path regardless of interest rates. However, a higher interest rate causes debt to go up much sooner.”
U.S. debt as a percentage of GDP will be 108.1 percent this year and 109.2 percent next year, the according to an International Monetary Fund forecast in April. Debt will reach 245.4 percent of GDP in Japan and 93.6 percent in the U.K. in 2013, it said.
Of the three, the U.K. would be least affected by an increase in borrowing costs because the average maturity of its debt, at around 14 years, is the longest, the BIS said. U.S. bonds mature in 64.5 months on average, according to data compiled by Bloomberg.
“This factor effectively provides some insurance against sharp interest-rate rises,” BIS said in the report. “That said, if left unchecked, age-related spending will put additional pressure on debt ratios further down the road.”
The BIS was formed in 1930 and acts as a central bank for the world’s monetary authorities.