Public debt in the developed world (DM) is forecast to rise to about 126% of GDP (gross domestic product) by 2020 from roughly 104% in 2010, despite a gradual tightening of fiscal policies, according to a baseline scenario of Deutsche Bank Research (DBR).
Sebastian Becker and Wolf von Rotberg, the authors of a new DBR paper on public debt say that should fiscal consolidation measures fail, public indebtedness could soar to more than 150% of GDP by 2020, according to their "no-policy-change" scenario. In addition, in the event of lower growth, weaker fiscal accounts and/or higher market interest rates, the DM public debt ratio could rise more sharply than sketched in the baseline scenario.
The economists say that apart from the EMU (European Monetary Union) peripheral countries the debt outlook for the US is particularly worrying. If US policymakers fail to agree on a more drastic consolidation programme than presumed in thebaseline scenario, the US debt stock may climb to around 134% of GDP by 2020. As a result, the debt interest burden could rise considerably over time and thus increasingly weigh on sovereign creditworthiness. The ratings agency Standard & Poor's recent move to attach a negative outlook to the US sovereign AAA long-term credit rating was a warning shot which deserves to be taken seriously.
The authors look at the structure - - currency makeup and ownership split between domestic and foreign holders - - and sustainability of the public debt 17 DM economies, including Ireland's.
On a GDP-weighted average, the DM public-debt-to-GDP ratio climbed sharply to around 104% in 2010 from 77% of GDP in 2007, a jump of more than 25% of GDP in just three years.
The economists say that European countries with notorious current account deficits, Greece and Portugal, as well as Ireland, mostly relied on financing from foreign creditors in the past. As shown in chart 14 on page 7 of the paper, public-external debt (foreign-owned) accounted for 67%, 61% and 59% of total debt in Greece, Ireland and Portugal, respectively, by the end of 2010 compared with 7% in Japan.
The paper says at the country level, most EMU peripherals (Ireland, Portugal, Spain and Greece) are likely to see their debt levels climb further despite harsh austerity measures. In the case of Greece, the debt stock could continue to climb to around 174% of GDP by 2020 and then stabilise. Ireland's would climb to 121% (see chart 76 on page 33). While the public-debt-to-GDP ratio could rise further in some major DMs like the US, Japan, Canada or the UK, it is projected to remain broadly unchanged in France (see charts 76, 77 and 79). Meanwhile, public debt levels could fall in Germany and Italy as well as in some other countries (Sweden, Denmark, Switzerland, Belgium and Australia), according to our baseline projections (see chart 79).
The economists conclude that in light of rapidly rising debt levels and a challenging fiscal outlook due to population ageing, many DM governments have to continue (or start, if not yet done) consolidating their government budgets to regain/ensure fiscal credibility and long-term debt sustainability. On average, DM fiscal policies are at the moment far away from near-term debt stabilisation, according to their analysis. Lowering debt ratios to pre-crisis (2007) or prudent benchmark levels will require a long consolidation process and thus strong political support and stamina to ultimately reach this goal.
Apart from the EMU peripheral countries, where public debt ratios could continue to rise due to unfavourable interest-rate/growth differentials, the US debt outlook remains particularily worrying. Becker and Von Rotberg say that if US fiscal policymakers fail to agree on a more drastic consolidation programme over the next few years than presumed in the baseline scenario, the US government debt stock could soar to around 134% of GDP by 2020, sharply up from 93.6% in 2010 and 62% in 2007.
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