Developed country debts hit WWII high at $39.8tn by the end of this year

Developed country debts hit WWII high at $39.8tn by the end of this year

28 March 2014 - 16:05 pm

The developed world’s borrowing binge peaked in 2012, but overall debts are still climbing and are expected to reach the highest since World War II for a slew of big countries.

The Organisation for Economic Co-operation and Development, a club of 34 rich countries estimates that member governments borrowed about $10.8tn last year, down from a peak of $11tn in 2012, and forecast the total would slip further to $10.6tn in 2014.

However, the OECD noted that the overall debt burden is still climbing sharply – to an estimated $39.8tn by the end of this year – which will pose a “significant challenge” to refinance in the coming years.

Government debt ratios are expected to further increase and remain at elevated levels in the near future. In fact, general government debt as a percentage of GDP is projected to surpass the World War II peak.

The OECD has included a striking chart in its latest report on government borrowing that underscores this point, seen below.

Low interest rates mean that the net interest payments as a percentage of economic outlput has remained relatively stable, but that could be reversed by the US Federal Reserve’s ongoing “tapering” of its quantitative easing programme and possibility of rate hikes in 2015.

The Fed is the world’s most powerful central bank, and shifts in its monetary policy have major knock-on effects elsewhere. The OECD duly noted a wide range of risks:

In sum, OECD debt managers continue to face continued sizeable borrowing operations amid a still fairly challenging environment with headwinds to global economic growth, heightened concerns about market and liquidity risk, higher long-term borrowing rates, the high uncertainty of the exact timing of the exit and tapering plans regarding asset purchase programmes by central banks, legacy risks related to incomplete financial sector reforms, the possible adverse impact on market liquidity of new regulations, reducing leverage and increasing capital cushions of banks in particular in the euro area, and downside risks with a build-up of imbalances in a wide range of emerging markets.