As interest rates bottom, debt matters, says Barclays
With global borrowing costs likely to be as low as possible, high debt levels will start to matter more in the years to come, Barclays study finds, highlighting Brazil as most at risk country to experience a crisis of growth and debt sustainability.
Barclays’ annual Equity Gilt study, released Tuesday, contradicts the debt thesis, whatever, championed by several senior economists, that prescribing countries should spend a lot to get economies out of the COVID-19 funk – a reversal of the situation. the long-held wisdom that high debt is risky.
While acknowledging that falling interest rates since the 2008 crisis had cushioned countries against rising debt, the study warned that the cycle was turning, as interest rates so-called effective lower bound, the point beyond which policy easing does more harm than good.
Highlighting the risks for emerging markets in particular, Barclays said that “limits to debt expansion exist and are being struck in the post-COVID-19 world, creating a high likelihood of macro-credit events in the world. decade to come “.
“Rates are unlikely to fall further, but global growth rates likely will. This will hurt repayment capacity, especially for low growth and high rate emerging economies,” he said. added.
Barclays said his approach differed from that of many economists, including the International Monetary Fund, in that first, it took into account the total debt of the economy rather than just public debt, and second, it considered the burden of local and foreign currency debt as equally important.
Her analysis shows that the countries with the largest savings deficits were the most unsustainable and she highlighted Brazil with a deficit of around 8% of annual GDP.
A potential growth rate estimated at 1% “implies that Brazilians would have to forgo any new consumption or investment for eight years to return to sustainability … Without a drastic change in Brazil’s potential growth rate, the pain of the adjustment needed for the country will be dramatic, “Barclays wrote.
However, as Brazil faces the 2022 elections, there are concerns that accelerating spending growth could further undermine the country’s reputation.
Barclays also highlighted the example of Turkey, where low public debt is offset by high levels of private sector debt, with the risk that these debts may eventually migrate to the sovereign balance sheet.
Overall, according to the note, a key difference between sustainable and unsustainable developing countries was that the latter already had real – or inflation-adjusted – interest rates at the high end of the observed range. between 2005 and 2017, while the reverse was true for the sustainable group.
Rating agency Fitch predicts that global public debt will reach $ 95 trillion by 2022, a record 40% increase in nominal terms from 2019’s pre-COVID-19 level.
Meanwhile, total global debt stood at $ 289 trillion at the end of the first quarter, the Institute of International Finance said in a report earlier in May.
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