• Dina Aletras / AMG

The Mountain of public debt is rising more than in 2008

The rating agency Moody's estimates a 20% increase in liabilities for advanced countries, double that which occurred during the financial crisis

The richest countries are threatened by a mountain of rapidly growing debt due to the coronavirus. According to an analysis by Moody's which examined 14 developed economies, liabilities are expected to grow by 19 percentage points this year compared to the gross domestic product, almost double the 2008/09 financial crisis. "The increase is more substantial and faster, reflecting the acute and global nature of the pandemic shock," said Moody's expert Marie Diron.

"This is a particular situation - explains Christian Gattiker, head of research for the bank Julius Bär - because the recession was triggered by an exogenous factor in the economy. Now private demand is weak, so governments intervene with fiscal policy packages to stimulate economic recovery ». As a result, budget deficits are likely to increase significantly.

Moody's issues brands for the solvency of countries. Investors and insurance companies are guided by this, as they are required by law to invest a large part of their assets in securities considered safe. A high public debt therefore hardly represents good news. However, according to the report, its sustainability should remain high, especially thanks to interest rates at very low levels that allow low-cost government debt. Furthermore, the economic recovery should gradually offset the consequences of the high budget deficits, thus allowing for the stabilization of debt levels.

"The fear is that heavy public debt sooner or later leads to super inflation, as happens in emerging countries," adds Gattiker. "But the advanced countries are not indebted to foreign countries and are less tied to global capital - except for the USA, which however has the dollar that acts as a global reserve currency. So they look more at the Japanese model, where despite the public debt is equal to 2.5 times the GDP, rates remain low and inflation is zero ».

The situation is very different for the countries taken into consideration. Italy, Japan and the United Kingdom are likely to be the hardest hit, with an expected increase in the debt level of 25 percentage points. In the United States, France, Spain, Canada and New Zealand the level is expected to increase by 20 percentage points, while in Germany an increase is well below 20 points. The higher debt is almost entirely or mainly linked to tax measures in Canada, New Zealand, the United Kingdom and the United States, while weaker nominal GDP growth contributes more to the increase in debt in Europe and Japan. For Switzerland and Sweden, the increase will be much more moderate. Particularly in Switzerland, writes Moody's,

At the same time, warns the rating agency, "countries that fail to reduce their debt levels will be more vulnerable to the economic or financial shocks induced by the financial markets in the future".

"At the moment there is also a strong pressure on the labor market for governments to bring unemployment back to pre-pandemic levels - points out Gattiker -. If a worker remains unemployed for too long, social costs may become much more painful in the long run than this increase in public debt. On the other hand, state intervention is linked to an extemporaneous shock and must be brought back to the ranks as soon as growth returns to stabilize. Both because the debt is also a burden for future generations, and not to lay the foundations for another excess that could ferry us into the next crisis.

by Erica Lanzi

Online article: https://bit.ly/2ARJkYb