LONDON (CNN) — The International Monetary Fund has warned that the high level of public debt in the United States could lead to higher global borrowing costs and undermine global financial stability.
International Monetary Fund He said This Wednesday, increased government spending, rising public debt and higher interest rates in the United States contributed to higher and volatile yields – or interest rates – on Treasury bonds, raising the risk of higher interest rates elsewhere.
According to their analysis, rising long-term US government bond yields are associated with similar rises in government debt yields in other advanced and developing economies, the latter of which are also experiencing exchange rate turmoil.
“The loose fiscal policy of the United States is putting upward pressure on global interest rates and the dollar,” Vitor Gaspar, Director of the International Monetary Fund's Financial Affairs Department, told reporters. “It puts upward pressure on financing costs in the rest of the world, exacerbating existing vulnerabilities and risks.”
This is the second time this week that the International Monetary Fund has attacked the US government. He said Tuesday that public spending and borrowing are contributing to the overheating of the U.S. economy, making it difficult for the Fed to beat inflation.
Higher interest rates make it more expensive for households and businesses to service their loans, which can lead to defaults that cause losses for banks and other lenders, increasing financial instability.
The IMF warning will heighten concerns about the broader consequences of rising US public debt, which the Treasury Department estimates at about $35 trillion.
On Tuesday, Treasury yields reached new highs for the year after Federal Reserve Chairman Jerome Powell signaled that official interest rates may remain high for some time due to persistent inflation in the United States.
US consumer prices rose thanks to debt-driven government spending (including pandemic stimulus), increasing household purchasing power and accelerating economic growth.
According to the International Monetary Fund, lax US fiscal policy, combined with an increase in the country's already heavy debt burden, may make the “last mile” difficult to bring inflation back to the Fed's target.
The Washington-based body is also concerned that if US inflation remains high, it could dash investors' hopes for lower interest rates, leading to a widespread sell-off in financial assets, including stocks and government bonds around the world. the world. The resulting decline in bond prices would raise bond yields.
“In this scenario, financial conditions would tighten across the board,” Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, wrote Tuesday in a blog accompanying the agency’s Global Financial Stability Report. He added: “Globally, borrowers will have more difficulty servicing debt due to rising bond yields.”
According to Gaspard, the problem could be particularly serious in low-income countries, where fiscal constraints are “particularly severe.” “High and volatile interest rates make the situation worse,” he added.
US debt looks riskier
There are risks for the United States as well. According to the International Monetary Fund, investors are demanding higher returns for holding US Treasuries, reflecting concerns about persistent inflation, the uncertain future path of monetary policy and additional debt issuance in the world's largest economy.
“The risk premium on (US) public debt has increased recently and may remain high in a context where debt levels are high,” the agency's chief economist, Pierre, told reporters on Tuesday.
This means that even if the Fed cuts interest rates later this year, which is the IMF's central scenario, the US government's financing costs may not fall by the same margin, he added.
This would put greater pressure on public finances, leaving less money for public services or to absorb future negative shocks to the economy, such as financial collapses, epidemics, or wars.
According to the Treasury Department, the US government's interest costs on a common measure rose to $659 billion in fiscal year 2023, which ended on September 30. This is nearly double what it was in fiscal year 2020.
According to the nonprofit Committee for a Responsible Federal Budget, in fiscal year 2023, the government spent more on servicing its debt than it did on housing, transportation, and higher education.
The International Monetary Fund expects US public debt to continue rising, helping global public debt approach 100% of global GDP in 2029, up from 93% last year.
The organization called on governments around the world to “fiscally moderate” in “the biggest election year in history.”
“History shows that governments tend to spend more and cut taxes during election years,” he said.
