Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Big economies face surging debt, have time to put house in order, Barclays says

Published 07/08/2020, 03:51 AM
Updated 07/08/2020, 06:00 AM
© Reuters. Day two of Italy's nationwide coronavirus lockdown, in Milan

© Reuters. Day two of Italy's nationwide coronavirus lockdown, in Milan

By Dhara Ranasinghe and Saikat Chatterjee

LONDON (Reuters) - Major developed economies face a surge in debt as the coronavirus crisis sparks massive fiscal stimulus, but they have time to get their houses in order, Barclays (LON:BARC) said on Wednesday.

In a new report on debt in developed markets, the British bank added that policymakers won't be able to ignore worsening fiscal profiles for long.

The ratio of debt to gross domestic product for G20 countries is set to rise above World War Two levels in the coming year. Barclays expects the U.S. ratio to rise almost 30 percentage points over the next two years; the euro area's is likely to grow to around 100% in 2020 from about 85% in 2019.

Barclays said the United States is seeing the greatest fiscal deterioration but is "least likely to face a reckoning" on its debt levels.

That is because the world's biggest economy enjoys the benefits of having the reserve currency and a large and liquid bond market that's less prone to volatility, Barclays said.

But the euro zone remains vulnerable, as a monetary union without a fiscal union.

Italy's debt burden is rising sharply, but its debt trajectory is likely to stabilise at high levels rather than end up on "unsustainable exponential path", Barclays said. It expects the country's debt/GDP ratio to reach 165%.

"The key contributor is the structurally low core interest rates and the ECB's commitment to putting a cap on Italian spreads," Barclays said, referring to the European Central Bank's asset-purchase scheme.

Barclays also said the bar for a new euro zone debt crisis was high versus 2010-12, noting a sharp fall in financing costs. It estimates average nominal yields on sovereign debt have fallen to below 2% from 3.75% in 2010.

But while borrowing costs in the eurozone have fallen broadly, the diverging economic trends between Southern and Northern Europe and its unique monetary system means Europe has to carve out a separate way to reduce overall debt.

Barclays expects redistributing money and credit and pursuing a policy of financial repression by putting a ceiling on bond yields will be the most relevant channels to reduce debt to income levels in highly indebted nations.

For Italy, "an evolution of partial fiscal transfers and debt mutualisation into a permanent one over time would provide protection in case of more permanent macro shocks in the interest rate environment," it said.

In Britain, Barclays expects debt management to come under greater scrutiny in a post-Brexit environment.

© Reuters. Day two of Italy's nationwide coronavirus lockdown, in Milan

"A belief that the gilt market will passively accept higher borrowings and less fiscal transparency may be an assumption that a future government does not have the luxury of making," Barclays said.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.