Debt: limited room for maneuver also for governments.
In our blog of May 2, 2023, it was shown against the background of individual collapsing US banks how the increased interest rates can be a problem – not primarily for the banks, which got into trouble primarily due to liquidity bottlenecks. It is a problem for the economy as a whole, as the banks are facing significant book losses due to the rise in interest rates, which will limit their room for maneuver for years to come.
It is currently estimated that since the first interest rate hikes by the US Fed in March 2022, over 600 billion in unrealized losses have been incurred on the balance sheets of US banks alone. By contrast, the equity of all US banks combined is estimated at just 2.2 trillion USD. When faced with the abyss, progress is not an option. Accordingly, the options for action of these financial institutions are limited.
The picture is not dissimilar for many countries. Over the past years of falling interest rates, crises have repeatedly been (supposedly) mastered by inflating government balance sheets through borrowing. The result is currently an unprecedented record high level of debt in the world – not only in absolute terms but also against the background of global value added. Our publication “Perspectives 4th Quarter 2023”, which will be published mid-October 2023, will take a closer look at this problem.
From the government’s point of view, debt growth is unproblematic as long as the economy grows in step, or at least interest rates fall sufficiently. Both developments could currently be at a crossroads.
Above all, interest rates, which have been rising at an unprecedented rate since March 2022, are leading to significantly higher refinancing costs. The shorter the remaining term of the debt, the faster this rise in interest rates will be felt. This is impressively demonstrated by the example of the USA: The short average remaining term of government debt leads to a painfully noticeable increase in interest expenses. The US government already has to spend more than 20% of its income on interest service – not including debt repayments. Governments will also suffer from significantly limited room for maneuver in the future.
