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Central bank reserve managers are growing increasingly concerned about “unsustainable” levels of government debt, which they believe could drive up borrowing costs in a bumper year for elections.
A global survey by UBS found that 37 per cent of central bank managers said that the risks from global sovereign debt levels were among their main concerns for the global economy this year, an increase from 14 per cent who worried about this last year.
The heightened concern comes as government debt globally hits a record $91.4tn this year, according to the Institute of International Finance. Global debt as a proportion of GDP is soon poised to tip back over 100 per cent for the first time since the depths of the coronavirus pandemic.
“The level of debt has been rising for a while now but so far we haven’t seen any real worry . . . It’s only really in the past six months that reserve manager concern has picked up . . . probably because we’re in an election year and the IMF has become more vocal,” said Max Castelli, head of global sovereign markets at UBS Asset Management.
“Higher debt is seen as leading to higher borrowing costs . . . and there is a risk of crowding out private investment, which will weigh on growth,” he added. UBS surveyed 40 central bank reserve managers overseeing trillions of dollars of assets.
Last month the IMF urged the US to “urgently” address its mounting government deficit. It took aim at the tax plans of both presidential candidates ahead of November’s election, and warned of higher financing costs and a growing risk to the smooth rollover of maturing debt.
Nearly three-quarters of central banks surveyed by UBS said persistent inflation and a rise in long-term yields were big concerns for the global economy.
A quarter predicted the US’s annual inflation rate would be between 3 and 4 per cent by June next year — significantly higher than the Federal Reserve’s 2 per cent target. US inflation was 3.3 per cent in May, down from a peak of 9.1 per cent in June 2022, with traders in swaps markets betting the Fed will start lowering interest rates in September or November.
“There isn’t yet any willingness among politicians to start dealing with the sustainability of public debt,” said Castelli. “On one end we’ve had monetary policy focused on bringing down inflation and tightening but on the other end fiscal policy has remained loose, which makes it harder to bring inflation to target.”
When asked about the economic impact of the upcoming US presidential election, three-quarters of reserve managers said the country would be likely to have higher public deficit levels under Donald Trump than President Joe Biden or another member of the Democratic party.
The survey also found that 83 per cent said a Trump presidency would be more inflationary, driven by promises of tax cuts and high tariffs on imports from China. This would add more pressure to the US budget deficit, which is likely to hit $1.9tn this year, according to the Congressional Budget Office, or about 7 per cent of GDP.
The proportion of reserve managers worried about the “weaponisation” of foreign exchange reserves has also risen sharply this year after the decision to use profits on Russia’s frozen assets to finance Ukraine, weakening the haven status of foreign exchange reserves for central banks.
“There is quite a lot of concern about the move from freezing assets to confiscating assets,” said Castelli. “Do we see any sign of a weakening of the dollar in the global financial architecture? The answer is no. But we see a slowdown of allocation to the renminbi.”
https://www.ft.com/content/adb432d1-df3a-49d1-8aca-bc43dd7b22b7
