In its blog post on the Financial Monitoring Report, the International Monetary Fund (IMF) stated that the high and increasing debt level strengthens the interaction between fiscal policy and interest rates.
In the article, it was pointed out that the increase in policy rates worsens the budget deficits and debt stock in cases where debt is already high, and it was emphasized that high debt makes market interest rates more sensitive to financial developments.
In the article, it was stated that data in the USA show that future expectations of long-term interest rates have become more sensitive to the projected public debt in recent years.
GLOBAL PUBLIC DEBT IS EXPECTED TO EXCEED 100 PERCENT OF GDP BY 2030
Mentioning that long-term government bond yields have risen sharply in major developed economies, the article noted that in the February-September period, the average of 10-year government bond yields of G7 countries increased by more than 1 point, reaching the highest level in nearly 20 years.
The article underlined that global public debt is expected to exceed 100 percent of global Gross Domestic Product (GDP) by 2030, and reminded that this level was last reached right after the Second World War.
The article noted that the shock in oil prices, persistent inflation, strong investment demand and higher growth expectations linked to artificial intelligence investments were among the factors that increased bond yields in developed economies, and it was reported that high indebtedness, spending pressures and the expectation of large amounts of bond issuance in the coming years also increased long-term borrowing costs.
In the article, it was stated that the increase in bond yields in major economies may be reflected in other countries and negatively affect the debt dynamics of these countries.
INCREASING INTEREST BURDEN NARROWS FISCAL MOVEMENT SPACE
It was stated in the article that the average borrowing cost of states is expected to increase from 2.3 percent in 2021 to 3.7 percent by 2031, and that increasing interest payments reduce the resources that can be allocated for public investments and social expenditures and limit the intervention capacity of governments against economic contractions.
In the article, it was pointed out that in some developed economies, the renewal of debts with shorter maturities caused the increase in policy interest rates to be reflected more quickly in public borrowing costs, and the fact that central banks had to keep interest rates higher for a longer period of time could worsen debt dynamics.
The article mentioned that financial concerns could push market interest rates up, and warned that high indebtedness and short-term borrowing could make it difficult to restore price stability.
It is stated in the article that developed economies with high indebtedness should take concrete measures based on reliable medium-term plans and realistic assumptions, and that these steps are important in terms of placing the debt on a sustainable path, limiting borrowing costs and reducing the negative effects on other countries.
In the article, it was emphasized that developing economies should reduce their financial fragility and strengthen debt management, and in low-income countries with limited access to external financing, it was stated that tax systems should be strengthened and the efficiency of public expenditures should be increased to protect priority expenditures.
It was stated in the article that postponing fiscal adjustment steps would increase the interest burden and financial vulnerabilities and further narrow policy options, and that the delay would make the measures required to stabilize the debt more comprehensive and costly.
